Are Insurance Carriers Violating the Constitutional Rights of the Cannabis Industry?

Cannabis Insurance Application

Questionable Questions Asked by Insurance Carriers

Applying for business Insurance through the use of applications produced by the insurance company is a normal business practice regardless of the industry.  What isn’t normal and seemingly unique with the insurance industry are questions to cannabis applicants if they are operating illegally and conducting criminal activity.  

Below are the exact questions currently used by a major insurance carrier we’ll keep anonymous at this time. 

  • Do you distribute your cannabis product to minors? 

Answering yes would potentially mean the applicant is violating state and federal law for selling cannabis to a minor.  One exception could be if the applicant is a medical marijuana licensee whose patient has a prescription from an MD who happens to be a minor. 

  • Do you transport or distribute your product across state lines? 

Answering would be an admission the applicant is distributing cannabis across state lines would be a violation of state and federal law.  

  • Do you either grow marijuana on public lands or purchase any marijuana grown on public lands? 

Once again, a potential violation of federal and state law by answering in the affirmative and self incrimination. 

These questions became part of a supplemental application for business property.  This is insurance coverage for buildings, equipment, tenant improvements, and loss of income.  As if the insurance process isn’t lengthy enough, the supplemental application is four pages totaling 31 questions with a sub-set of approximately 40 more questions.           

Apparently, the insurance industry has forgotten certain provisions within the US Constitution affording citizens of rights.  More specifically, the Fifth and Sixth Amendment protects the rights of individuals from self incrimination and allows due process to be performed before an individual is denied their freedom.  

Amendment V

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Source:  Cornell Law School

Amendment VI

In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the state and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the assistance of counsel for his defense.

Source:  Cornell Law School

Most people have heard to plead the fifth or being given their Miranda rights.  The sixth amendment gives everyone the opportunity have their day in court. 

What about other industries?  Are similar questions being asked in the Pharmaceutical and Liquor Industry?

NoNot even remotely close. 

We reviewed other insurance applications used for the Pharmaceutical Industry offered through CNA Insurance and Kinsale Insurance Company to determine the scope of their questions.   Neither of these two applications asked questions that would place a person(s) in legal jeopardy.

How about the liquor industry? 

Those Insurance applications don’t question an applicants ongoing criminal violations either.   One application asked if the insured had been convicted of a felony.  A conviction of a felony is different from conducting a felony.   

Properly Underwrite Risk without Violating the Rights of Others   

Cannabis Insurance Police

Photo by Vincent Chan on Unsplash

Most insurance brokers and underwriters will  not object to the proper underwriting and evaluation of risk by the insurance industry before coverage is offered and purchased.  This would include being in compliance with all laws. 

However, it would not be appropriate and possibly illegal for insurance companies to continue with this line of questioning as a business practice.  If the applicant indicates yes to providing cannabis to minors would the insurance company deny the application and notify law enforcement? 

Insurance companies are not members of the law enforcement community and should leave it to the professionals.     

Insurance Application Questions

 

The Aftermath of When a Cannabis Insurance Company Leaves the Industry

Changing insurance is time consuming and complicated for the customer and insurance broker

Throughout our history insuring cannabis companies, we’ve seen many insurance carriers enter and exit the industry.  It’s the same old story presented to us enthusiastically, we have a great new program to offer your clients.  Our time spent on the specifics of their program evaluating pricing, coverages, and policy forms only to result several months later the story has changed with them ending their program.

The reason is the same–cannabis is federally illegal or a recent change has spooked them in the opposite direction. 

Strange, how the realization of the program they built, not one person from the insurance carrier asked themselves should we insure a Schedule 1 drug listed on the Controlled Substance Act with customers selling, distributing and manufacturing it? 

If we do, what risks should we prepare for when insuring this segment.  When you think about, it’s really a risk management 101 question.

When insurance carriers decide to leave the cannabis industry many times they fail to consider the consequences of their decision on the companies they insure.  Those consequences include the hassle of securing a new insurance carrier, analyzing coverage differences, and understanding the differences between their former policy and new policy.   To properly buy insurance is time consuming not only for the client, but the retail insurance broker representing their interests.  

A professional retail insurance broker can easily spend numerous hours evaluating with their client the risk and coverages.  The coverage analysis between insurance companies and their policies requires piecing together the intricate details of complicated terms to gain a understanding of potential deficiencies.   

Commercial liability may have different exclusions and endorsements 

No two commercial liability policies will be exactly the same.  A former program offered by a insurance carrier not only offered a occurrence based Products and Completed Operations Aggregate, but extended liability with several endorsements below: 

  • Blanket Additional Insured When Required by Contract
  • Liberalization Included
  • Per Location and Per Project Aggregates Included
  • Waiver of Transfer of Rights of Recover Included

Obtaining these types of coverages with a new cannabis insurance carrier will be difficult if not impossible to achieve. Once again, the customer through their insurance broker are left to deal with this problem.

Business Property may have different deductibles and coinsurance penalties

Changing to a new insurance carrier may have different coinsurance penalties and deductibles on business property coverages.  Property means building, tenant improvements, grow equipment, computers, cannabis, etc…. 

Coinsurance is a penalty for not being insured to value on your property.  A lower coinsurance percentage is better than a higher percentage because of the way the formula is calculated in the policy.  If a customer is being placed with a new insurance carrier at 90%, knowing they had a 80% coinsurance clause, then the new policy will be a disadvantage.  

The deductibles may be different from old to new policy.  Some policies offer $1,000, while new policies may offer higher deductibles at $2,500 with special requirements for theft or hail.    

Product liability can be a thorn to switch from carrier to carrier

A significant impact when a insurance carrier abandons their program is if the insured has a product liability.  Why? 

Depending on the type of insurance policy, the transition from claims made to occurrence based may have implications along with exclusions inside those policies that remove coverage.  Occurrence is a better policy because it takes away the relevance of time not having to be recognized past or future.  Claims made must recognize the past and future in order to properly indemnify the underlying risks that may be brewing.   

Certain product liability insurance carriers have an exclusion for cannabis.   Essentially, these policies may be worthless in our opinion.  Other carriers might exclude the certain portions of a product line such as their vape pens.  Both of these exclusions can have dramatic impact on how a claim may be settled.  The insurance broker with their client are left

Pricing from the old to the new policy likely to be higher

The insurance carrier exiting the cannabis industry will have likely procured a substantial number of new insurance customers due to competitive pricing.  We most recently saved a cannabis cultivation company a significant amount of premium changing them to a new program.  They will enjoy the savings for one year with improved coverages only to be notified their policy will be non-renewed at their policy anniversary.

Most likely, their new product liability insurance policy will be more expensive.  Once again, the insurance broker is forced to deliver the bad news your new insurance will be more expensive.


 

 

Insurance Carriers Evaluate if We’re In or Out with Marijuana

The insurance industry as always been and will continue to be the oxygen to ignite any industry

 

On any given day it would appear if the cannabis insurance industry is having an identity crisis trying to determine if they should or should not insure the marijuana industry.  Recent announcements from the “in crowd” include California based Gold Bear Insurance Company and Topa Insurance.  The “out crowd” includes Evanston Insurance Company and Risk Placement Services.  If we’re keeping score its tied evenly.  Of course, this doesn’t take into consideration other insurance carriers outside our sphere and when Lloyds of London was perhaps the original domino to say no to marijuana.

The most recent cause for this neurosis seems linked to the reversal by the Department of Justice to retract the Cole Memorandum, while insurance executives witness the creation of the world’s largest cannabis market in California.  A interesting dilemma as two worlds collide between profit versus legality and reputation.

As one of our Surplus Lines Broker said about the fluctuating insurance market has necessitated a daily dose of stomach medication to calm their nerves.  

Various US Attorneys in states like Colorado and Washington have issued their responses when their boss issued the new directive. Colorado Attorney General Cynthia Coffman went further in her Washington Post opinion piece stating “It is too late to dismantle the marijuana industry.” Coffman went further by recognizing the will of the voters and putting aside her lack of support to legalize recreational marijuana.

These reactions may provide the insurance industry with some level of “security” needed to continue to pioneer through these trails. The cannabis industry must have stable and reliable insurance partners to protect their companies, other parties, and as a matter of public policy. The insurance industry as always been and will continue to be the oxygen necessary to ignite any industry.

 

Justice News

Department of Justice
Office of Public Affairs

FOR IMMEDIATE RELEASE
Thursday, January 4, 2018

Justice Department Issues Memo on Marijuana Enforcement

 

The Department of Justice today issued a memo on federal marijuana enforcement policy announcing a return to the rule of law and the rescission of previous guidance documents. Since the passage of the Controlled Substances Act (CSA) in 1970, Congress has generally prohibited the cultivation, distribution, and possession of marijuana.

 

In the memorandum, Attorney General Jeff Sessions directs all U.S. Attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities. This return to the rule of law is also a return of trust and local control to federal prosecutors who know where and how to deploy Justice Department resources most effectively to reduce violent crime, stem the tide of the drug crisis, and dismantle criminal gangs.

 

“It is the mission of the Department of Justice to enforce the laws of the United States, and the previous issuance of guidance undermines the rule of law and the ability of our local, state, tribal, and federal law enforcement partners to carry out this mission,” said Attorney General Jeff Sessions. “Therefore, today’s memo on federal marijuana enforcement simply directs all U.S. Attorneys to use previously established prosecutorial principles that provide them all the necessary tools to disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country.”

Attorney General Jeff Sessions Federal Marijuana Enforcement Memorandum

ag_marijuana_enforcement_1.4.18_0(4)

The Cole Memorandum

DOJ James Cole Memo

Reversal of the Cole Memorandum has Another Surplus Lines Broker Exiting the Cannabis Industry

Offering Cannabis Insurance may not be Worth the Risk

Managing General Agent Risk Placement Services, Inc (“RPS”) has announced their departure from offering insurance to the cannabis industry as a result of Attorney General Jeff Sessions recent roll back of the Cole Memorandum paving the opportunity to enforce federal cannabis laws.  RPS’ program was a sleeping giant launched recently in Colorado and established in Nevada that offered a comprehensive program with reasonable policy forms.  They partnered with United Specialty Insurance to offer general liability, product liability, and a variety of property coverages.  The local Colorado office was enthusiastic to be offering such a competitive program to the industry.

RPS’ decision is not unique as Evanston Insurance Company took similar action to exit out of the medical cannabis industry shortly after the Jeff Sessions announcement.  Their timing may have been either positively or negatively influenced by the amount of potential business they could have reaped in California.  If they had stayed committed to their program, the amount of business from California would have been significant.

While no specific examples of federal enforcement are evident by the change in position with the current administration, the impact is leaving many insurance executives asking if the risk of insuring pot is worth it.  This news come on the heels of Cannasure aligning themselves with Topa Insurance Company to begin offering their own cannabis insurance program.  

 

Cannasure Insurance Aligns with Topa Insurance Company to Offer Cannabis Program

Cannasure Appears to Position itself as the Premier Cannabis Insurance MGA and Wholesale Broker

Cannasure Patrick

Linkedin Patrick McManamon

Cannasure  Insurance Services appears to be heading in a different direction from their retail insurance operations with their recent announcement to become a licensed MGA and wholesale broker to the cannabis industry.  According to their press release, the insurance carrier they have aligned themselves is California based Topa Insurance Company.  We have little experience with this insurance carrier.  The initial reaction from other industry members has been neutral.   

According to their website, Cleveland based Cannasure was started in 2010 by Patrick McManamon whose family has a long history in the insurance industry.  Cannasure is a strategic partner of The Arcview Group and recently secured funding from The Krauter Group an insurance brokerage and private equity firm.  According to the website CB Insights, The Krauter Group made a $500,000 investment.

Other Cannabis MGA’s and Wholesalers Likely to Respond Quickly

This move by Cannasure will put more pressure on other cannabis insurance programs that have been operating in the space to improve their coverage offerings and pricing in order to compete particularly as California heats up. This is a normal reaction we’ve seen when California based Next Wave Insurance had one of the more comprehensive insurance program at one point in time particularly with their crop and product liability insurance offering.  That changed as Next Wave  scaled their operations, the existing insurance carriers responded by expanding their lines of business. 

Clearly, the two cannabis wholesalers are going to be competing ferociously in California for market share.   MGA’s and Wholesale Brokers will continue to seek business from professional cannabis insurance brokers with experience in the industry as these programs scale to avoid unnecessary losses as a result of broker negligence. 

What does this mean for Retail Insurance Brokers? 

Retail insurance brokers choosing insurance carriers on behalf of their clients must be due diligent with each underwriting group in order to obtain accurate information.  The insurance industry is notorious for transferring risk to the weakest link.  Retail insurance brokers must guard their clients and their agencies from this occurring.   In addition, Retail Insurance Brokers will need to demand better response times from their wholesale brokers as this apparently has been a real issue for certain groups.   

Cannasure Insurance Services Press Release 

CLEVELAND, Jan. 30, 2018 /PRNewswire/ — Cannasure Insurance Services (Cannasure), the premier cannabis insurance MGA and wholesale broker, announced today it will launch a comprehensive coverage program to support the cannabis industry.

“We are excited to announce that Cannasure recently finalized the development of a cannabis program that will offer all lines of coverage to medical and recreational business owners,” said Patrick McManamon, CEO of Cannasure Insurance Services. “Our program is backed by Topa Insurance Group, a leading boutique property-casualty insurer and will provide enhanced and comprehensive coverages. Initially, the program will be offered on a non-admitted basis; however, we are exploring admitted opportunities in target states.”

 

The Cannasure program will offer the following coverage lines: Property, General Liability, Products Liability, Crop and Excess Liability. The program is designed to support the primary industry operations, which include: Dispensaries, Cultivators, Processors/Manufacturers, Ancillary Businesses, Landlords and Testing Laboratories.

 

“The cannabis industry is evolving at an unprecedented rate, and because of this so are the industry-specific risk factors and operational demands,” McManamon said. “Since we opened our doors in 2010, Cannasure has been in the trenches with clients understanding their business, challenges, opportunities as well as the regulatory requirements. This firsthand accounting enabled us to partner with Topa, an ‘A-‘ A.M. Best-rated carrier that has truly taken the time to understand this industry and is committed to bringing forward relevant coverages (terms and conditions) that support the ever-changing cannabis industry. Because of this, we are excited to launch our program for new business submission effective February 1, 2018.”

 

The program will be managed by Kieran O’Rourke, Director of Underwriting, of Cannasure’s MGA division.

 

“Overall, Cannasure continues to provide robust access to coverage solutions for all aspects of the cannabis industry, whether it comes from our proprietary program or our wholesale operation,” McManamon said.

 

Cannasure Insurance Services (http://www.cannasure.com) is a leading cannabis MGA and wholesale broker. Cannasure is a full-service insurance group providing leading-edge solutions to cannabis business owners in the U.S. that include cultivators, dispensaries, processors and products manufacturers, testing laboratories, landlords and ancillary businesses for retail insurance agents and brokers. Located in Westlake, Ohio, Cannasure is licensed in all states where legalized cannabis is offered (medical and recreational) and provides a broad range of solutions that includes, but is not limited to, General Liability, Product Liability, Auto (Primary/Excess), All Risk Property, Inland Marine, Stock Throughput, Professional and Management Liability, Umbrella and Workers’ Compensation.

 

Topa Insurance Company is one of the wholly owned subsidiaries of Topa Insurance Group, a boutique insurance holding company based in Calabasas, California, which provides wholesale insurance solutions. Other subsidiaries include Alphyn Universal Insurance Solutions (CA), Dorchester Insurance Company (USVI), NevPac Reinsurance (BVI), and Topa Insurance Services (USVI). Topa Insurance Group is focused on underwriting profit, operational excellence and agility for continuous growth. For more information about Topa Insurance Group, please visit http://www.topa-ins.com.

Evanston Insurance Company No Longer Offering Insurance to Cannabis Industry

Change in Tone by Department of Justice Cited as Reason for Insurance Carrier’s Departure

Product Liability Insurance Markel Corp Brochure

Source:  Markel Corp Product Brochure

Markel Corp., through one of its affiliated companies Evanston Insurance Company, has decided to no longer offer medical cannabis insurance to the marketplace.  According to Markel Corp’s February 2017 Product Listing, they are the 5th largest Excess & Surplus Lines insurer and ranked 476 on Fortune 500 company.    

According to our sources, the insurance carrier cited the recent change in position by Attorney General Jeff Sessions as their reason for the departure. The Attorney General most recently changed the direction of the Department of Justice to allow US Attorneys to decide if federal enforcement of cannabis laws will be in their best interest.

Evanston Insurance Company had been a primary insurance market for the placement of medical marijuana operations.  They were never a player or market for recreational cannabis.  But, their ability to offer commercial and product liability with substantial limits through an umbrella policy was a significant coverage offering.  Their departure will leave a gap for certain types of customers and require licensees to carefully evaluate their insurance and risk needs. 

Opportunity for other insurance carriers to step in

The news by the Attorney General may cause other insurance carriers to hit the pause button just as California begins a massive undertaking to create a regulated marketplace.  Other insurance carriers might see this as an opportunity to capture market share and expand their coverage lines particularly for those companies who have been operating in this segment for several years.

If you’re currently insured with Markel Corp/Evanston Insurance Company, the carrier will continue your coverage until the policy renews.  Furthermore, existing quotes will be honored for the next 30 days.   Insured’s are encouraged to contact their insurance broker for further information.