Take A Hit: Encouraging the Commercial Insurance Market to Underwrite Marijuana 

Take A Hit: Encouraging the Commercial Insurance Market to Underwrite Marijuana 

Author: Jacob Mareschal Rudin

Table of Contents

Section		Page
I.	Introduction	3
II.	Formation and Interpretation of Insurance Contracts	4
III.	Enforceability of Contracts Relating to Marijuana	7
IV.	Federal Laws Implicated by the Commercial Insuring of Marijuana	9
A.	Controlled Substances Act	9
B.	Racketeer Influenced and Corrupt Organizations Act	11
C.	Money Laundering Act	13
V.	Encouraging More Insurers to Enter the Market	14
A.	Clear Federal Guidance Absolving Insurers of Liability	15
i.	Clarifying Law Around Insurance of Marijuana Act	15
ii.	Secure And Fair Enforcement Regulation Banking Act	16
iii.	Legislative Next Steps	18
B.	The Environmental Social Governance Argument for Insuring Marijuana Adjacent Businesses	20
VI.	Conclusion: Industry-Wide High Premiums May Be Inevitable	24

Appendix
A.	A Reintroduced CLAIM Act with Less Ambiguity	27
B.	An Amended Sec. 3 of the SAFER Banking Act to Have a Broader Scope	34

 

Introduction

As of 2023, thirty-nine states/territories have legalized medical marijuana with twenty also legalizing its recreational use.  While support for the legalization of marijuana is blazing ahead, the industry’s demand for commercial insurance is rising from the ashes. According to New Dawn Risk, a globally recognized specialty insurance advisor, as recently as 2021, the commercial insurance market for marijuana was estimated to be valued at over one billion dollars. A key driver of this demand are states which require licensed marijuana operators to maintain certain levels of liability coverage. 

However, despite a growing need from legislation mandating its purchase, the marijuana market remains relatively underserved by commercial insurance. Although more than half of states have legalized some form of marijuana, the drug remains federally illegal as a controlled substance. Concerns over the legal implications from insuring marijuana have led to most insurance solutions only being available in the non-admitted excess and surplus lines market.

The marijuana industry does not need to remain underserved by commercial insurance for eternity. Clearer federal guidance on the legality of insuring marijuana would ease market entry-related hesitancy. Additionally, non-federal social pressures could be leveraged to incentivize more insurance companies to consider entering the marijuana market. 

 

Formation and Interpretation of Insurance Contracts

An insurer provides insurance coverage in exchange for a premium. The insured pays a premium to the insurer to purchase coverage. Insurance coverage is a form of indemnity. The insurer indemnifies the insured by holding the insured “harmless from losses or liability.”  Commercial property insurance covers business real and personal property. Property may be covered on an actual cash value basis (factors in the depreciation of property at time of loss) or replacement cost basis (value as if property was new). Commercial casualty insurance covers the liabilities which arise from everyday business operations; premises, products completed, directors and officers, employment practices, etc. Liability policies contain an aggregate (total) coverage limit and a per occurrence (per instance of loss) limit.

 The scope of insurance coverage is governed by a contract, the policy. Insurance policies are contracts of adhesion. Insurers employ an army of lawyers, claims professionals, and actuaries to carefully craft contractual language. Even the largest commercial insurance buyers have little to no bargaining power over the specific terms of coverage contained within the contract. Although larger pockets won’t materially impact the terms of what is covered, they can purchase greater limits of liability.

The enforceability of insurance contracts is essential to a functioning insurance marketplace. To purchase coverage, insureds must assent to terms of a contract that are not drafted by them, and which are favorable to the counterparty of their transaction. Where ambiguities in contractual language exist in contracts of adhesion, the Restatement (Second) of Contracts § 206 dictates interpretation against the draftsmen (an insured-friendly interpretation of contractual ambiguities).  If an insured were to disagree with an insurer’s coverage decision, their civil remedy primarily is a breach of contract claim. Insured (as plaintiff) would allege that a contract was breached when coverage which was owed under the contract was wrongfully denied by the defendant (insurer).

Insurers have every incentive to misconstrue policy language in their own favor to deny the claims of their insureds. Despite marketing themselves as your friend offering protection to you in a time of need, insurers are still seeking to be a profitable business. According to Consumer Reports, even when a caring insurer offers a premium reduction program, the insured often pays a heavy hidden price for it.

Many insureds would be surprised to realize exactly how the premiums they pay are spent by insurers. Your helpful neighborhood insurance agent is really doublespeak for a salesperson, skimming a percentage-based commission off the top every time a policy is purchased and/or renewed.   The hunger for new business at the cost of premiums is further exemplified by major insurers (Geico, Progressive, All State, and State Farm) collectively spending about 3.7 billion dollars on advertising in 2023. 

Yet even after covering for the insurer’s overhead, the remainder of premiums collected are still not fully devoted to paying out the claims of the insureds. To achieve profitability, insurers must retain a surplus of premiums collected greater than the amount that is needed to settle claims. Essentially, insurers are profitable when they successfully bet against their insureds requiring the coverage that they paid premiums for. Insurers raise the stakes of their gambling by leveraging the premium collected to invest into financial instruments. Which is a risky proposition that market returns will outgrow the value of potential claims during a period. Insurers have every incentive to maximize profit by minimizing the amount paid out for insurance claims.

The unfortunate reality of purchasing coverage is that insureds don’t quite understand how important the policy language is until after they suffer a loss. However, even if an insured’s loss is covered by the policy, it will likely still be wrongfully denied by the insurer, forcing an insured who seeks a reversal of a coverage decision to engage in a potentially lengthy and costly civil litigation. Ironically, the market for insurance doesn’t operate much more efficiently even when the government steps in as an insurer of last resort. Despite no incentive to maximize a return of profit for shareholders, government insurers often operate with a significant inability to cover claims with premium reserves, sometimes due to deficits in the billions of dollars. 

 

Enforceability of Contracts Relating to Marijuana 

Typically, our legal system is reserved to handle non-illicit business dealings. Since marijuana is still federally recognized as a Schedule 1 controlled substance, when given the occasion, some federal courts have remanded marijuana-related cases back to state courts. Due to its continued federal illegality, marijuana-related companies still lack access to federal bankruptcy protections, trademark access, and income tax deductions.  However, even if a federal or state court chooses to hear a breach of contract dispute relating to marijuana, a question still arises over the contract’s enforceability. 

A contract that serves an illicit purpose may be unenforceable on grounds of public policy. The Second Restatement of Contracts § 178(1) explains that “a promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.”  Courts will not enforce a breach of contract claim against a hitman who failed to murder his victim. Similarly, the legal system offers no remedy to an addict who was shorted on their most recent purchase from their black-market drug dealer.

Even when an insurer agrees to underwrite a marijuana-related business, the insurer will likely still try and argue against the enforceability of that contract. In Green Earth Wellness v. Atain Specialty Insurance Company, the defendant insurer denied a claim for damaged marijuana buds on the grounds that the contract was unenforceable due to public policy and that relevant insurance policy exclusions applied. In deciding to enforce the contract, the court looked to the intent of the parties. In choosing to insure a marijuana-related risk, defendant (insurer) crafted their own contract. The insurer was not induced to underwrite this business under fraud or duress. It would be unjust to let them now decide marijuana was uncoverable after creating a contract specifically to cover marijuana.

The outcome of Green Earth Wellness is in line with much of the insurance policy jurisprudence dictating that the interpretation of coverage relies upon the reasonable expectations of the insured. In Green Earth Wellness, the insurer knew the type of business that they were underwriting. Despite the existence of a contraband exception in the policy, the Plaintiff had a reasonable expectation that the insurer would cover marijuana. The insurer was aware of Plaintiff’s operations and had agreed to insure them. Many jurisdictions protect the reasonable expectations of insureds “even if a painstaking study of the policy provisions would have negated those expectations.” Although the contraband exclusion in Green Earth Wellness may have been applicable, plaintiff had the reasonable expectation that it had purchased coverage for its marijuana operations. 

To counteract the public policy argument against the enforcement of marijuana related contracts, some states have passed legislation mandating their enforceability. Section C.24:6I-53 of the NJ CREAMM Act dictates that, “No contract shall be unenforceable on the basis that manufacturing, distributing, possessing, or using any cannabis item or marijuana is prohibited by federal law.”  Legislation that mandates enforcement of marijuana-related contracts has clouded the argument that their enforcement is against public policy. Courts across various jurisdictions have held the marijuana adjacency of contracts to not be grounds for unenforceability.

 

Federal Laws Implicated by the Commercial Insuring of Marijuana 

Controlled Substances Act

The Controlled Substances Act (CSA) prohibits controlled substances from being knowingly or intentionally manufactured, distributed, dispensed, or possessed. Marijuana’s federal illegality stems from its classification under the CSA as a schedule 1 controlled substance.  Schedule 1 controlled substances are substances or drugs which have: 

– a high potential for abuse

– no currently accepted medical use

– a lack of accepted safe administration method. 

The harshest punishments in the CSA are reserved for schedule 1 controlled substances, and scale with the quantity of the substance.

The CSA defines marijuana as “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin”. Hemp plants are excluded from the CSA’s definition of marijuana. Hemp comes from the same Cannabis sativa L. plant as marijuana, but hemp differs as it contains a, “delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

However, the commercial insuring of a controlled substance does not violate the prohibited acts of the CSA. An insurer underwriting a marijuana risk does not manufacture marijuana. A manufacturer of marijuana is a business or person whose operation involves the “production, preparation, propagation, compounding, or processing” of marijuana.  An insurer does not deliver any product other than insurance, therefore an insurer is not a distributor of marijuana.  Likewise, an insurer does not transfer marijuana to the end user, so it does not dispense the drug.

While the CSA does not define possession, the Model Penal Code (MPC) explains that to possess, one must have “knowingly procured or received the thing possessed or was aware of his control thereof for a sufficient period to have been able to terminate his possession”. At no part in the commercial insurance transaction does the insurer take control or ownership over the property of the insured. An insurer never receives or procures marijuana from the insured. Yet marijuana’s classification under the CSA remains relevant to the federal implications of the enforcement of commercial insurance contracts for marijuana due to indirect regulation from other laws.

Racketeer Influenced and Corrupt Organizations Act 

The Racketeering Influenced Corrupt Organizations Act (RICO) prohibits an enterprise or individual indirectly/directly associated with an enterprise from engaging in a pattern of racketeering activity for profit through interstate commerce. Racketeering activity generally means illegal activity and explicitly includes the “dealing in a controlled substance or listed chemical (as defined in section 102 of the Controlled Substances Act).” The Supreme Court has held that due to the difficulties of distinguishing between “legal” and “illegal” marijuana, even an operator engaging only within its state’s borders participates in interstate commerce.  A failed merger and acquisition of vertically integrated marijuana companies has also satisfied the interstate commerce requirement of RICO charges. 

Licensed marijuana operators, as for-profit entities engaged in the interstate sale of a controlled substance for profit, inherently violate the acts prohibited by 18 U.S.C. § 1962 and as defined by 18 U.S.C. 1961(1). But that does not necessarily mean an insurer of a licensed marijuana operator engages in racketeering activity. Although liability for racketeering does not require an individual or organization to be a formal member of a racketeering enterprise, merely assisting in racketeering is not enough to establish liability. Where an outside accounting firm enabled the racketeering activity of an enterprise, the Supreme Court held that the accountants did not have enough control over the racketeering for liability to be extended to them. A commercial insurer does not have control over the decisions and operations of licensed marijuana enterprises.

However, that is not to say that the consideration of RICO charges is irrelevant to commercial insurers underwriting marijuana. Although insurers like outside accountants are not in control of the racketeering enterprise, insurers agreed to indemnify an enterprise engaging in racketeering. The costs associated with extending indemnification to an organization engaged in racketeering activity are expensive. The civil remedies available to a plaintiff in a RICO suit are three times that of “the damage he sustains and the cost of suit.”  The difficulties and expenses associated with indemnifying racketeering-related civil liabilities have caused many commercial liability insurance policies covering marijuana to be accompanied by high premiums and significant coverage gaps.

Money Laundering Act

Under the Money Laundering Act, individuals or organizations within the United States are prohibited from “knowingly engaging or attempt[ing] to engage in a monetary transaction in criminally derived property of a value greater than $10,000 and is derived from specified unlawful activity.” A monetary transaction as defined by the act encompasses any “deposit, withdrawal, transfer or exchange, in or affecting interstate or foreign commerce, of funds … to a financial institution.”  Financial institutions include commercial property and casualty insurance companies. 

As defined by the act, criminally derived property includes the “proceeds obtained from a criminal offense.”  The manufacture, distribution, dispensing, and possession of marijuana remain federally criminal under the CSA. Therefore, the proceeds that state-licensed marijuana operators generate from within their businesses constitute criminally derived property. Marijuana’s classification as a controlled substance is especially relevant because violation of the CSA is recognized as specified unlawful activity for the purposes of money laundering. 

Most commercial insurance policies far exceed $10,000 in premiums. The trade of marijuana is considered interstate commerce even when marijuana grown by licensed operators never leaves the state. Given that insurers are financial institutions, they are unable to knowingly accept monetary transactions of this size derived from the sale of marijuana. The premiums paid by licensed marijuana operators are criminally derived from specific unlawful activity. Insurers are aware of the business they underwrite, and therefore know of its illegal origins. The monetary transactions prohibited by the Money Laundering Act create the heaviest federal law implications of insuring marijuana, where liability is directly imposed on the insurer.

 

Encouraging More Insurers to Enter the Market.

The lack of reliable commercial insurance options available to the marijuana market is not due to insurers lacking capacity or know-how. The NAIC’s Cannabis Working Group (C) has identified many operationally similar risks to various marijuana-related businesses that most major insurers already underwrite. The insurance industry’s present capacity for marijuana risks is further exemplified by continuing education credits and professional certifications already existing for cannabis coverage; Cannabis Insurance Coverage Specialist (CICS).

Insurers don’t even have to submit FDIC suspicious activity reports for the premiums they collect from marijuana risks as insurers do not fit the definition of banks or institutions which fall under the jurisdiction of the FDIC. Yet the commercial insurance market for marijuana remains underserved due to insurer-related hesitancy. Clearer federal guidelines absolving insurers of federal legal liability from underwriting marijuana are needed. Additionally, this market entry-related hesitancy could be alleviated by leveraging social pressure to encourage the insuring of marijuana. 

Clear Federal Guidance Absolving Insurers of Liability

Clarifying Law Around Insurance of Marijuana Act

Before the 117^th Congress, Senator Bob Menendez introduced the Clarifying Law Around Insurance of Marijuana Act (CLAIM act). The purpose of the CLAIM Act was to “create a safe harbor for insurers engaging in the business of insurance in connection with a cannabis-related legitimate business, and for other purposes.” A cannabis-related legitimate business is any business “that involves handling cannabis or cannabis products”, “pursuant to a law established by a State or a political subdivision of a State.” The act uses the term “cannabis” synonymously with the term “marijuana” as defined by the CSA. Cannabis products are anything containing marijuana, including “concentrate, an edible, a tincture, a cannabis-infused product, or a topical.”

The CLAIM Act restricts federal agencies from taking three courses of action. First, a federal agency may not “prohibit, penalize, or otherwise discourage an insurer from engaging” with marijuana businesses and states where marijuana businesses operate. Second, it is prohibited for them to impede an insurer’s capability because of their decision to underwrite cannabis-related legitimate businesses. Finally, federal agencies may not entice insurers to discriminate against cannabis-related legitimate businesses and their employees/operators, by means of refusal of business, downgrading, or policy cancellation. 

However even if passed, the CLAIM act cannot force market participation. The act itself acknowledges this major limitation. Explicitly, the act is not to be construed to “require an insurer to engage in the business of insurance in connection with a cannabis-related legitimate business.”  The act merely seeks to protect insurers of marijuana and employees of licensed marijuana operators as insureds. To complement the CLAIM act, market entry could be encouraged by leveraging non-federal social pressures to incentivize the insuring of marijuana.

Secure and Fair Enforcement Regulation Banking Act

Before the 118^th Congress, Senator Jeff Merkley introduced the Secure and Fair Enforcement Regulation Banking Act (SAFER Banking Act). The SAFER Banking Act seeks to “provid[e] protection[n] for federally regulated financial institutions that serve state sanctioned marijuana businesses.” Both the CLAIM act and the SAFER Banking Act were referred to the Senate Committee on Banking, Housing, and Urban Affairs. However, unlike the CLAIM Act, the SAFER Baking Act advanced out of the committee and will proceed before the Senate which is the farthest a bill addressing the friction between financial services and legitimate marijuana businesses has ever progressed. 

Most of the favorable press coverage relating to the SAFER Banking Act stems from its third section, which provides “Safe Harbor for Depository Institutions”.  Section 3’s safe harbor provisions dictate that Federal banking regulators are prohibited from punishing, penalizing, discouraging, or taking any otherwise adverse action against a depository institution for accepting deposits from state-sanctioned marijuana business and their employees/operators. The federal acts prohibited by the SAFER Banking Act are very similar to those prohibited by the CLAIM Act. Although prohibiting similar activity, the activity prohibited by section 3 of the SAFER Banking Act only applies to depository institutions whereas the CLAIM Act only provides safe harbor to insurers. Insurers do not fit the definition of “depository institutions”. 

But that is not to say that section 3 of the SAFER Banking Act has no impact on Insurers. Marijuana businesses are cash only and lack access to the financial system and services available to non-marijuana businesses of similar size. Lacking access to banks, marijuana businesses are forced to store and protect their own cash reserves. Despite the implementation of armed guards, and some of the most technologically advanced safety protocols, the data have shown that these security implementations do not materially mitigate the high theft risk for the industry. The passage of the SAFER Banking Act would decrease the amount of cash Marijuana companies must insure and will also decrease the likelihood of thefts, making marijuana operators a more attractive risk to underwrite. 

However, the SAFER Banking Act’s impact on insurance goes beyond just decreasing theft risk and cash reserves on premises. Despite most of the media’s focus being solely on section 3, the SAFER Banking Act contains sixteen total sections. Section 4 of the title absolves a service provided to state-sanctioned marijuana of liability under the Money Laundering Act (18 U.S.C. §1956 & 1957), which was the only indirect federal regulation on the insuring of marijuana for which insurers directly bore the liability.

Further, section 5(a) of the act provides additional greater federal law protections to financial services for marijuana companies in general. Providers of financial services to marijuana, including “insurer[s] may not be held liable pursuant to any federal law or regulation…” merely for “providing such a service” or reinvesting profits from the service.  Insurance providers are granted further direct protection from section 5(c) which absolves insurers of marijuana of federal liability “solely for engaging in the business of insurance” or reinvesting their profits. If passed, the SAFER Baking Act provides significant assurances to potential insurers of marijuana that they will remain in good federal legal standing.

Legislative Next Steps

The CLAIM Act was referred to the Senate Committee on Banking, Housing, and Urban Affairs on March 18, 2021. However, over two and a half years later, the committee has taken no action on the bill. The CLAIM Act lies dormant and forgotten, requiring resuscitation.

In part, the greater success of the SAFER Banking Act can be attributed to its lack of ambiguity compared to the CLAIM Act. The SAFER Banking Act consistently uses the term “marijuana” throughout which is the same term the CSA uses to describe the drug. While the CLAIM act contains “marijuana” in its title, in its body the act exclusively uses the term “cannabis” instead. It is confounding why the co-authors of the CLAIM Act decided to use the two terms interchangeably, as opposed to sticking to the CSA-defined term as used in its title. 

The SAFER Banking Act was the reintroduction of the SAFE Banking Act. Like the CLAIM Act, the SAFE Baking Act did not achieve much success. The co-authors of the CLAIM Act should reintroduce the bill before the Senate.  The second rendition of the CLAIM Act should be revised to eliminate its interchangeable use of “marijuana” and “cannabis” and stick to “marijuana”. Not only is “marijuana” already in the title of the CLAIM Act, but it is also the term used by the significantly more successful SAFER Banking Act. 

As written, the federal agency actions regulated by the SAFER Banking Act are only bank regulators. Section 3 of the SAFER Banking Act applies narrowly to the regulation of depository institutions, whereas section 5(a) applies generally to all financial services. Section 3 of the SAFER Banking Act should be amended to broaden the scope of prohibited federal activity.  Instead of merely applying to federal banking regulators, section 3 should be written to apply to all federal agencies. Further, the safe harbor provision could be edited to apply to all “financial services” as opposed to just “depository institutions”.

The SAFER Banking Act’s definition of financial services includes “the business of insurance”.  A broadened section 3 would protect insurers in the same manner that the CLAIM Act would. Therefore, if amended it would be redundant to reintroduce a newer version of the CLAIM Act. Broadening the scope of section 3 of the SAFER Banking Act is the legislative path of least resistance for protecting insurers from federal regulators.

Although the progress of the SAFER Banking act is promising, the legislative process is long. The bill will still require bipartisan support when voted on to pass. Even if it passes the Senate, the success of the SAFER Banking Act likely depends on who is in office after the 2024 presidential election. In recent years, Democratic administrations have been more favorable policy wise to legitimate marijuana businesses than Republican administrations.  

The Environmental Social Governance Argument for Insuring Marijuana Adjacent Businesses

Environmental, Social, Governance (ESG) investing was initially first discussed in a 2004 UN Report sponsored by many of the major global investment banks. ESG looks beyond the balance sheet to view companies and investment capital as key drivers of social change and sustainability. In the decades since ESG’s formal inception, the investing phenomenon has soared in popularity. As of 2022, ESG investment strategies accounted for one third of all investment assets managed by financial professionals in the United States, amounting to approximately seventeen trillion dollars of assets under management (AUM).  

Generally, investment managers can accomplish the goals of ESG investment strategies by executing a two-pronged approach to achieving social change. The first essential step is to integrate ESG principles into the financial analysis used when making asset allocation decisions. According to the Financial Times, rating agencies give out ESG scores to industries as a whole and individual corporations, in a similar manner to how corporate credit is rated. A higher ESG rating is indicative of an industry or company that embodies the principles underlying ESG investing.

The Sustainable Investment Forum emphasizes that a key component of ESG scores is community investing, which “seeks explicitly to finance projects or institutions that will serve poor and underserved communities in the United States and overseas.” The importance of community investing is to make valuable resources available to communities who would not otherwise be able to access them. 

Many states have integrated supporting underserved communities within their marijuana regulatory regimes. For example, in New Jersey, priority applications are granted to diverse owners, economically challenged areas, and impact zones.  Impact zones are determined by considering, “population, past criminal marijuana enterprises, law enforcement activity, rates of unemployment, and poverty.” States have placed a clear emphasis on impacting communities in need when crafting marijuana legislation.

Additionally, to some advocates of underserved marginalized communities, the legalization of marijuana represents a form of reparations.  The American Civil Liberties Union (ACLU) of New York argues that “Marijuana legalization offers a blueprint for how to begin rooting out the white supremacy”, given the disproportionate racial impact in the enforcement of Marijuana related crimes. Not only does the legalization of marijuana lead to investments in underserved communities, but legalization also serves as a building block to right racial wrongs. Supporting the industries and businesses involved in state regulated marijuana operations inherently fits within the ESG concept of community investing. 

After integrating, the next step of driving change through ESG investing is to incorporate this ESG-integrated financial analysis to guide investment. Impact investing is defined as “Targeted investments aimed at solving social or environmental problems.”  A higher ESG score correlates to a higher likelihood of an asset’s inclusion in an ESG-themed fund. Given the strong market power of the ethical investor, a favorable ESG score is essential for a publicly traded corporation seeking to maximize its appearance as an investible asset to potential shareholders. After all, the price of a stock reflects the interest the market has in purchasing a share of said stock. 

Unlike other sectors, the insurance industry has not backed down from defending the ESG principles they embody when the spotlight is cast upon them. Insurers appeared before the Texas legislature to lobby against proposed anti-ESG legislation. The Vice President of the Reinsurance Association of America testified that, “if there are climate-changing weather patterns, insurance companies need the flexibility to factor that in.” Although Insurers in Texas only vocally advocated for the importance of climate change factors, committing to acting on environmental factors is almost always accompanied by committing to act on social factors. 

The insurance industry’s awareness of ESG concepts is not geographically isolated to Texas. Globally, approximately 85% of insurance companies believe that all aspects of the operational functions of their businesses will be impacted by ESG factors. Over half of global insurance company CEO’s reported to PWC that they felt pressure from investors to be ESG-conscious.  Additionally, 49% expressed that they were “extremely or very concerned with the impact of social inequality on their ability to sell products and services.” Insurers across the globe have wholeheartedly embodied the concepts of ESG into their organizations.

Somewhat surprisingly, insurance companies have established themselves as early adopters and champions of many key ESG principles. The equitable social justice impacts of marijuana legalization on underserved communities aligns with the core values of the ESG philosophy. The ethical investor possesses large market power and is actively concerned about socioeconomic issues while managing their investments. Insurance company executives who are conscious of maximizing shareholder value and stock price have an incentive to be rated as favorably as possible by ESG metrics. Therefore, the inclusion of consideration of whether insurers underwrite marijuana risks into ESG scores would serve as an effective means to encourage greater market participation and new market entrants. 

Conclusion: Industry-Wide High Premiums May Be Inevitable

The need for commercial insurance has been quietly increasing year over year in the shadows of the greater growth of the marijuana industry. Due to increasing demand and a lack of availability, commercial insurance for marijuana is accompanied by very high premiums. According to one of the largest US cultivators, the insurance premiums for their marijuana growing sites are almost twice as expensive as their non-marijuana farming facilities. In the commercial insurance market’s current state, the needs of marijuana companies remain underserved and will likely continue to be without change.

Commercial insurers’ hesitancy towards underwriting the risks of the marijuana market is not without good cause. The federal law implications of insuring marijuana remain ominously murky as the SAFER Banking Act hasn’t been voted on yet and with the stalling of the CLAIM Act. Insurers are correct to question if growing a potential new business segment is worth risking their good legal standing. Absent passage of the SAFER Banking Act, the marijuana industry will remain cash-dependent which subjects operators to having a high risk of theft and difficulty paying insurers (and all other business partners) in cash.  

Nonfederal pressures could also make insuring marijuana a more attractive risk. Insurers are conscious of social justice issues and ESG scores. The movement for the legalization of marijuana has a strong connection to racial inequality. ESG rating agencies favorably considering insuring marijuana would be an effective carrot on a stick to hold in front of the commercial insurance industry to induce entry into the marijuana market. Importantly, insurers have already demonstrated that they are willing to stand up to potential ESG related backlash.

Insurance is a data-based field. As more time passes, along with the increased adoption of standardized forms, insuring the marijuana industry (which is still relatively infantile) will become much more predictable. Although insurance offers protection for when unexpected events occur, insurers crave predictability. Additionally, the passing of time will lead to technological advancements which may also encourage more market entry. If testing for intoxication of marijuana reaches the same standard as alcohol intoxication testing devices, workplace safety and liability risks would be significantly decreased.

Clearer federal guidelines, ESG score incentivization, increased data, and advancements in technology will likely lead to more market entry which in turn will increase the number of admitted insurers in the marketplace. However, asking an insurer to assume liability for a Ferrari will always come at a much higher price than asking them to insure a Honda Civic. The high value of marijuana plants and the inherent risk associated with their distribution is unavoidable for insurers when calculating what to charge for premiums. Encouraging market entry is nonetheless still important as it will provide the marijuana industry with better, more reliable commercial insurance solutions to choose from.

Appendix A:

A Reintroduced CLAIM Act With Less Ambiguity

SECTION 1. SHORT TITLE.

This Act may be cited as the “Reintroduced Clarifying Law Around Insurance of Marijuana Act” or the “Reintroduced CLAIM Act”.

SEC. 2. SAFE HARBOR FOR INSURERS AND THE BUSINESS OF INSURANCE.

(a) Definitions.—In this Act:

(1) MARIJUANA.—The term “marijuana” has the meaning given the term “marihuana” in section 102 of the Controlled Substances Act (21 U.S.C. 802).

(2) MARIJUANA PRODUCT.—The term “marijuana product” means any article that contains marijuana, including an article which is a concentrate, an edible, a tincture, a cannabis-infused product, or a topical.

(3) MARIJUANA-RELATED LEGITIMATE BUSINESS.—The term “marijuana-related legitimate business” means a manufacturer, producer, or any person or company that—

(A) engages in any activity described in subparagraph (B) pursuant to a law established by a State or a political subdivision of a State, as determined by the State or political subdivision; and

(B) participates in any business or organized activity that involves handling marijuana or marijuana products, including cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing marijuana or marijuana products.

(4) FEDERAL AGENCY.—The term “Federal agency”—

(A) has the meaning given the term “Executive agency” in section 105 of title 5, United States Code; and

(B) includes a private attorney described in section 3002(1)(B) of title 28, United States Code.

(5) FINANCIAL SERVICE.—The term “financial service”—

(A) means a financial product or service, as defined in section 1002 of the Consumer Financial Protection Act of 2010 (12 U.S.C. 5481); and

(B) includes—

(i) the business of insurance;

(ii) whether performed directly or indirectly, the authorizing, processing, clearing, settling, billing, transferring for deposit, transmitting, delivering, instructing to be delivered, reconciling, collecting, or otherwise effectuating or facilitating of payments or funds, where such payments or funds are made or transferred by any means, including by the use of credit cards, debit cards, other payment cards, or other access devices, accounts, original or substitute checks, or electronic funds transfers;

(iii) acting as a money transmitting business that directly or indirectly makes use of a depository institution in connection with effectuating or facilitating a payment for a cannabis-related legitimate business or service provider in compliance with section 5330 of title 31, United States Code, and any applicable State law; and

(iv) acting as an armored car service for processing and depositing with a depository institution or a Federal Reserve bank with respect to any monetary instruments, as defined in section 1956(c) of title 18, United States Code.

(6) INDIAN COUNTRY.—The term “Indian country” has the meaning given the term in section 1151 of title 18, United States Code.

(7) INDIAN TRIBE.—The term “Indian Tribe” has the meaning given the term in section 102 of the Federally Recognized Indian Tribe List Act of 1994 (25 U.S.C. 479a).

(8) INSURER.—The term “insurer” has the meaning given the term in section 313(r) of title 31, United States Code.

(9) MANUFACTURER.—The term “manufacturer” means a person or company who manufactures, compounds, converts, processes, prepares, or packages marijuana or marijuana products.

(10) PRODUCER.—The term “producer” means a person who plants, cultivates, harvests, or in any way facilitates the natural growth of marijuana.

(11) STATE.—The term “State” means each of the several States, the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States.

(b) Insurers.—A Federal agency may not—

(1) prohibit, penalize, or otherwise discourage an insurer from engaging in the business of insurance in connection with—

(A) a marijuana-related legitimate business; or

(B) a State, political subdivision of a State, or Indian Tribe that exercises jurisdiction over marijuana-related legitimate businesses;

(2) terminate, cancel, or otherwise limit the policies of an insurer solely because the insurer has engaged in the business of insurance in connection with a marijuana-related legitimate business;

(3) recommend, incentivize, or encourage an insurer not to engage in the business of insurance in connection with a policyholder, or downgrade or cancel the insurance and insurance services offered to a policyholder solely because—

(A) the policyholder is—

(i) a manufacturer or producer; or

(ii) the owner, operator, or employee of a marijuana-related legitimate business;

(B) the policyholder later becomes an employee, owner, or operator of a marijuana-related legitimate business; or

(C) the insurer was not aware that the policyholder is an employee, owner, or operator of a marijuana-related legitimate business; or

(4) take any adverse or corrective supervisory action on a policy to—

(A) a marijuana-related legitimate business, solely because the owner or operator owns or operates a cannabis-related legitimate business;

(B) an employee, owner, or operator of a marijuana-related legitimate business or service provider, solely because the employee, owner, or operator is employed by, owns, or operates a cannabis-related legitimate business, as applicable; or

(C) an owner or operator of real estate or equipment that is leased to a marijuana-related legitimate business, solely because the owner or operator of the real estate or equipment leased the equipment or real estate to a marijuana-related legitimate business, as applicable.

(c) Protections Under Federal Law.—With respect to engaging in the business of insurance within a State, political subdivision of a State, or Indian country that allows the cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase of marijuana pursuant to a law or regulation of such State, political subdivision, or Indian Tribe that has jurisdiction over the Indian country, as applicable, an insurer that engages in the business of insurance with a marijuana-related legitimate business or service provider or who otherwise engages with a person in a transaction permissible under State law related to marijuana, and the officers, directors, and employees of that insurer may not be held liable pursuant to any Federal law or regulation—

(1) solely for engaging in the business of insurance; or

(2) for further investing any income derived from such business of insurance.

(d) Rule Of Construction.—Nothing in this Act shall—

(1) require an insurer to engage in the business of insurance in connection with a marijuana-related legitimate business; or

(2) interfere with the regulation of the business of insurance in accordance with the Act of March 9, 1945 (59 Stat. 33, chapter 20; 15 U.S.C. 1011 et seq.) (commonly known as the “McCarran-Ferguson Act”), and the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5301 et seq.).

SEC. 3. GAO STUDY ON DIVERSITY AND INCLUSION.

(a) Study.—The Comptroller General of the United States shall carry out a study on the barriers to marketplace entry, including in the licensing process, and the access to financial services for potential and existing minority-owned and women-owned marijuana-related legitimate businesses.

(b) Report.—The Comptroller General shall submit to Congress a report—

(1) containing all findings and determinations made in carrying out the study required under subsection (a); and

(2) containing any regulatory or legislative recommendations for removing barriers to marketplace entry, including in the licensing process, and expanding access to financial services for potential and existing minority-owned and women-owned marijuana-related legitimate businesses.

Appendix B:

An Amended Sec. 3 of the SAFER Banking Act to Have a Broader Scope

SEC. 3. SAFE HARBOR FOR FINANCIAL INSTITUTIONS.

(a) Prohibition.—A Federal regulator may not—

(1) terminate or limit the deposit insurance or share insurance of a financial institution under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) or the Federal Credit Union Act (12 U.S.C. 1751 et seq.) or take any other adverse action against a financial institution under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) or the Federal Credit Union Act (12 U.S.C. 1751 et seq.) solely because the financial institution provides or has provided financial services to a State-sanctioned marijuana business or service provider;

(2) prohibit a financial institution from providing, or penalize a financial institution for providing, financial services to—

(A) a State-sanctioned marijuana business or service provider solely because the business or service provider is a State-sanctioned marijuana business or service provider; or

(B) a State, an Indian Tribe, or a political subdivision of a State solely because that entity exercises jurisdiction over State-sanctioned marijuana businesses;

(3) recommend, incentivize, or encourage a financial institution not to offer financial services to an account holder, or to downgrade or cancel the financial services offered to an account holder, solely because—

(A) the account holder is a State-sanctioned marijuana business or service provider, or is an employee, owner, or operator of a State-sanctioned marijuana business or service provider;

(B) the account holder later becomes an employee, owner, or operator of a State-sanctioned marijuana business or service provider; or

(C) the depository institution was not aware, after conducting sufficient risk-based customer due diligence in accordance with applicable requirements, that the account holder is an employee, owner, or operator of a State-sanctioned marijuana business or service provider;

(4) take any adverse or corrective supervisory action on a loan made to—

(A) a State-sanctioned marijuana business or service provider, solely because the business is a State-sanctioned marijuana business or service provider;

(B) an employee, owner, or operator of a State-sanctioned marijuana business or service provider, solely because the employee, owner, or operator is employed by, owns, or operates a State-sanctioned marijuana business or service provider, as applicable; or

(C) an owner or operator of real estate or equipment that is leased to a State-sanctioned marijuana business or service provider, solely because the owner or operator of the real estate or equipment leased the equipment or real estate to a State-sanctioned marijuana business or service provider, as applicable; or

(5) prohibit a financial institution (or entity performing a financial service for or in association with a financial institution) from, or penalize a financial institution (or entity performing a financial service for or in association with a financial institution) for, engaging in a financial service for a State-sanctioned marijuana business or service provider solely because the business or service provider is a State-sanctioned marijuana business or service provider.

(b) Safe Harbor Applicable To De Novo Institutions.—Subsection (a) shall apply to an institution applying for a financial institution charter to the same extent as such subsection applies to a financial institution.