2019 saw important developments in US law and litigation that will affect insurers offering coverage to cannabis businesses.
Challenges for the burgeoning "legal" cannabis industry
A recent industry report projected the burgeoning "legal" cannabis industry in the United States to grow at a compound annual growth rate of 14% over the next six years, reaching $30 billion by 2025.
US federal law currently outlaws cultivation, possession, and distribution of cannabis despite the fact that 33 states now permit some medical cannabis use, and from 1 January 2020, 11 states and the District of Columbia have authorised the sale and use of recreational cannabis.
This quasi-legal status of the industry has created challenges for cannabis business owners to obtain insurance and financing. Many financial services and insurance companies shy away from cannabis businesses due to criminal and civil liability concerns. Consequently, cannabis companies often must do business in cash, creating risk, and other aspects of the unique risk profile can make insurance difficult to find.
The SAFE Banking Act
In September 2019, the US House of Representatives voted 321 to 103 in favour of HR1595, the Secure and Fair Enforcement Banking Act of 2019 ( SAFE Banking Act). The bill enjoyed significant bi-partisan support in the House, but is expected to face an uphill battle in the US Senate. The bill will enable cannabis businesses to secure financial services, including insurance, that may have been otherwise unobtainable.
If ultimately enacted, the SAFE Banking Act would afford a wide range of financial institutions and related entities, including insurance companies and their officers, directors, and employees, safe harbour for serving "cannabis-related legitimate businesses" in states where cannabis has been legalised.
"Cannabis-related legitimate business" is defined as "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 such State or political subdivision; and (B) participates in any business or organised activity that involves handling cannabis or cannabis products, including cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products."
The Act would protect against enforcement of federal law, and provides that proceeds from transactions with cannabis businesses are not derived from unlawful activity under federal money laundering laws. The act was amended to extend protection to hemp and cannabidiol (CBD) businesses.
Protection for insurers
A specific provision ("Protection for Insurers") provides:
"With respect to engaging in the business of insurance within a State, political subdivision of a State . . .that allows the cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase of cannabis pursuant to a law or regulation of such State, [or] political subdivision, . . . an insurer that engages in the business of insurance with a cannabis-related legitimate business or service provider or who otherwise engages with a person in a transaction permissible under State law related to cannabis, and the officers, directors, and employees of that insurer may not be held liable pursuant to any Federal law or regulation:
- solely for engaging in the business of insurance; or
- for further investing any income derived from the business of insurance."
This provides express protection for insurers of legal cannabis businesses.
Exposure for the "legal" cannabis industry from vaping
The US Centers for Disease Control and Prevention (CDC) reported that as of 20 November 2019, there were 2,290 cases of lung injury (EVALI) and 47 deaths associated with electronic cigarette use (also known as vaping) in 49 US states, the District of Columbia, and US territories.
The CDC recently identified vitamin E acetate as a "chemical of concern" found in the lungs of 29 patients with EVALI. Vitamin E acetate is used as a thickening agent in some electronic cigarettes containing THC - the psychoactive agent in cannabis.
Litigation arising from alleged vaping injuries was already increasing in 2019 prior to the EVALI outbreak. One case, brought by a Connecticut man against JUUL Labs, Inc. in the California Superior Court for San Francisco County, alleged that in 2017 he suffered a massive hemorrhagic stroke due to his addiction to JUUL's electronic cigarettes. A putative class action was brought by two teenaged plaintiffs in Alabama federal court on 22 May 2019, against JUUL, Altria, and Philip Morris, alleging they developed severe breathing problems due to addiction to JUUL electronic cigarettes marketed to minors.
Because over eighty percent of the EVALI cases appear to be linked to vitamin E acetate additives, there is a perceived increase in exposure to cannabis businesses. This, in turn, has increased interest in insurance, and particularly product liability coverage.
Cannabis businesses with occurrence-based general liability coverage may have product liability risks excluded from coverage. This, combined with exclusions for conduct that is illegal under state or federal law, may make enactment of the SAFE Banking Act all the more important for insurers to meet the insurance needs of US cannabis businesses.
What is on the horizon in 2020?
Looking forward to the SAFE Banking Act's prospects in the US Senate in 2020, twenty-eight Democrats and five Republicans have co-sponsored a version of the legislation. The amendment extending protection to hemp and CBD businesses is seen as potentially favorable to Senate Majority Leader Mitch McConnell, who supports legalization of hemp for the benefit of farmers in Kentucky. This may improve chances of a full Senate vote on the legislation and thereafter opportunities for insurers.