🔒With major players sitting on sidelines, cannabis companies seek alternatives in finding insurance coverage

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Hartford arguably still owns the title of “insurance capital of the world,” but many national insurers that call Connecticut home are expected to shy away from the state’s recreational cannabis market because the substance is still illegal at the federal level.

That represents yet another challenge for cannabis companies looking to launch or expand in the state to serve the new adult-use market.

The Connecticut Insurance Department (CID) published a report in January outlining the insurance market for cannabis companies. It concluded that no “admitted” insurers, or companies licensed by the agency to write insurance in the state, are currently providing coverage for marijuana businesses, meaning big players like The Hartford and Travelers Cos. are opting to sit on the sidelines for now.

“For the bigger and larger carriers, it may take them a little bit of time to come around until it’s federally regulated and legal, because insurance is an old business and it’s very conservative,” said Kara Collins, an account executive at HPM Insurance, an independent insurance agency with operations in Connecticut, Massachusetts and New Hampshire.

HPM recently began serving the cannabis market. The company works with several insurance carriers to provide coverage, Collins said, and she expects independent agencies and brokers to take up the responsibility of helping insure future cannabis businesses.

Smaller, more niche cannabis-focused insurers have become the primary coverage option for the marijuana industry nationwide, and will likely play a key role in providing protection to companies that enter Connecticut’s recreational market, experts said.

Like other employers, cannabis companies will have to get liability and property coverage and workers’ compensation insurance. Cultivators will also need agriculture insurance, and delivery or distribution companies may need auto insurance. Other coverage needs could arise as new license types develop, experts said.

The issue

George Bradner, assistant deputy commissioner and director of the property casualty division at the Connecticut Insurance Department, said many national insurance companies are hesitant to enter a heavily-regulated market that is still technically illegal federally, something that has been common in other states as they’ve legalized cannabis.

At the same time, many legalization states, such as California and Massachusetts, have made insurance a requirement for licensing marijuana businesses.

Connecticut hasn’t formally made that declaration yet, but it may.

“You have to remember that we deal with risk,” said Eric George, president of the Insurance Association of Connecticut (IAC). “That’s what insurance deals with all the time, and while the state can say that something is permissible and legal, the federal government has said that it’s not. So, when you have an industry that bases everything it does on risk, and you’re talking about permission being granted at the state level but not at the federal level, you have concern.”

The IAC is an industry trade organization for homeowner, auto and life insurance carriers in the state. George and Bradner both said the issue with insurance companies is similar to the banking industry as it relates to cannabis: without federal legalization, there are barriers.

Insurers are conservative by nature and developing cannabis coverage is a challenge because the industry is new and there isn’t a long history of loss trends, making it harder to price risk.

“New and innovative insurance products for which there is no loss history are difficult, if not impossible to appropriately price using common actuarial methods,” the CID report said. “Often, after a new coverage has generated sufficient data, the coverage eventually becomes a standard product in the admitted market but that has not yet happened in the emerging cannabis market.”

Representatives from both The Hartford and Travelers declined to comment about their involvement in the cannabis industry.

Further, several existing medical dispensaries also declined to comment about what types of insurance they have, and who provides it.

Sarah Westby, co-chair of Hartford law firm Shipman & Goodwin’s cannabis industry practice, said there have been bills proposed in Congress to allow insurance companies to cover cannabis businesses without the threat of federal penalties, like the CLAIM Act, which was introduced in March 2021.

“However, like with proposed banking legislation, nothing has passed both houses of Congress yet,” she said.

Other options, for now

Working with smaller insurers or creating captive insurance could be options for upcoming cannabis companies, experts said.

Non-admitted insurers, also called surplus lines insurers, are companies that aren’t technically licensed by the Connecticut Insurance Department but are still allowed to write coverage in the state in certain areas. Admitted companies have to meet certain financial requirements with the CID and file rates and contracts with the department.

“We don’t oversee them,” Bradner said of non-admitted companies. “If something happens to this company and the insurer goes bankrupt, there’s no protection under the state guaranty fund.”

Non-admitted companies are usually allowed to provide coverage in higher-risk markets, George said, and could step into Connecticut’s cannabis market.

They often come from states that have already legalized cannabis so they have experience covering the sector.

“There are insurance companies and brokerage firms, such as [California-based] Cannasure, that specialize in serving the cannabis industry, so cannabis businesses do have some options,” Westby said.

Other specialty insurance players include The Cannabis Insurance Co., which popped up in Colorado years ago and now serves other states, and Delaware-based Admiral Insurance Group.

Collins, of insurance brokerage HPM, said she had been wanting to get into the cannabis industry for years and was happy that her firm had a more progressive mindset to serve the industry.

“At HPM we really focus on identifying with entrepreneurs in the cannabis space and helping them identify the risks, and really helping them be successful in this because it is so nuanced — it’s a brave new world,” Collins said.

She said HPM partners with more than 45 insurance carriers that have willingly worked with cannabis companies as states have legalized marijuana for medical and/or recreational use.

Cannabis businesses can also think about forming captive insurance companies to manage their risks, according to the CID report, as long as they meet certain regulatory requirements.

Bradner said his agency hopes the American Association of Insurance Services (AAIS), a national insurance advisory organization, files a cannabis coverage policy in Connecticut, as it did in California in 2018. That would help establish template contract guidelines and policy breakdowns that could ease the entry of admitted insurers currently shying away from the market.

“It’s nice when you have an organization like AAIS that develops those contracts, because there’s standardization into contractual wording that is used versus companies being all over the place with different wording,” Bradner said.

Collins said she thinks more smaller insurers and brokers will continue to pop up in Connecticut as businesses get licensed and start to enter the cannabis industry.

Eventually, some of the big players may also get past their reluctance, when and if federal restrictions are eased.

“To get the larger insurers to feel comfortable in insuring the cannabis industry, there really does need to be changes at the federal level,” George said.