'Shades of gray' in cannabis law means insurers need to step carefully

Due diligence on how insureds operate is one way companies can stay on the 'light side' - expert

'Shades of gray' in cannabis law means insurers need to step carefully


By Alicja Grzadkowska

The web of cannabis law in the US is a tangled one, with complexities and new developments that insurers planning to enter the space, or those who are already in it, need to keep careful tabs on. This week alone Maine’s legislature reached a compromise on legal marijuana sales, and former US House speaker John Boehner changed his mind on marijuana and will promote legalization.

“Every week, there’s a developing body of law. It’s sometime difficult to keep track of the latest events,” said Ian Stewart, cannabis law practice team co-chair at Wilson Elser Moskowitz Edelman & Dicker LLP who will be speaking at the upcoming Cannabis Cover event – a multi-city masterclass in May with stops in Denver, Los Angeles and Las Vegas.

At the state level, each has a different regulatory regime for adult use and medicinal use of marijuana.

“In some states, you have medicinal use for any type of cannabis, but you could use the whole part of the plant and any derivative of the plant,” explained Dean Rocco, employment and labor practice group, and CannaLaw practice group co-chair at Wilson Elser who will be speaking with Stewart at the Cannabis Cover masterclass. For example, a doctor in California can write a prescription for marijuana to treat a headache, while in Texas, a more conservative state, a law was just passed this year that allows for only limited CBD use.

But it was Attorney General Jeff Sessions’ rescission of the Cole Memo in January that was felt across the industry, with US attorneys in different districts across states now having the discretion to prosecute adult use. There has yet to be noticeable action, said Stewart, and the main concern seems to be transportation of the product across state lines, but it has changed the playing field for insurers nonetheless.

“There were a couple of significant surplus lines players who were in the space that have exited the market. Most notably, that would be Markel and XL Catlin,” he explained. “There have been a couple of others that have exited as well. They haven’t specifically said that they did so because of the concerns over federal illegality, but Markel and XL Catlin have said that.

“Other carriers that were not yet in the market but had plans to enter have decided to hold off for the time being just to give some time to see if there’s actually actions behind the implied threat of stepped up federal enforcement.”

Finally, carriers who have been insuring the marijuana market for a while see it as an opportunity to double down on their efforts and increase their market share, added Stewart.

Where insurers might be concerned is that the rescission of the Cole Memo has thrown a wrench into the Financial Crimes Enforcement Network’s (FinCEN) guidelines for institutions wanting to do business in the cannabis industry. Those guidelines were in part based on the Cole Memo.

“Here’s the problem: when Attorney General Sessions rescinded the Cole Memo, it’s been reported he did so without communicating with Treasury, so there was a schism between the DOJ and Treasury,” explained Stewart. “Treasury has since come and out said, ‘despite the fact that the DOJ rescinded the Cole Memo, our recommendations to banks and insurance companies – the FINCEN guidelines – remain in play.’”

Stewart’s advice to insurers is to do due diligence to understand who their insureds are, and make sure those companies are properly licensed within the state they’re operating. Other concerns should be whether insureds are not violating state laws and not shipping product over state lines. Going forward, insurers need to proceed with a robust underwriting process and regular updates on customers where they ask insureds to fill out renewals re-certifying due diligence items, according to Stewart.

“The bottom line is: it’s not a black and white issue,” he told Insurance Business. “It’s shades of gray and insurance companies, if they want to operate in this space, they need to operate on the light side of gray. It’s a business risk and it’s one of those things where each individual company has to decide how much risk that company is willing to take on to be working in this space.”

Ian Stewart and Dean Rocco will be leading a session on cannabis law with a focus on insurability and federal regulations at the Cannabis Cover event being held on May 03, 15 and 31 in Denver, Las Vegas and Los Angeles. Click here for more details and to register.


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