Cannabis is a banned controlled substance under the federal Controlled Substances Act and thus manufacturing, selling, or distributing cannabis violates federal criminal law. That notwithstanding, the marijuana business is growing as the number of states that have decriminalized or legalized medical and/or recreational use of marijuana continues to grow. Many states are addressing this issue now that the majority of Americans support legalization.
The legalization or decriminalization of marijuana raises a variety of issues, including those relating to federal prosecution, insurance regulation, and the enforceability of insurance policies issued to the cannabis industry. In an attempt to ease industry concerns relating to the threat of federal prosecution, a 2013 Department of Justice (DOJ) memorandum identified certain priorities of enforcement, including those focusing on the distribution of marijuana to minors, the diversion of marijuana into states where the sale is illegal, and the prevention of marijuana revenue going to criminal or gang enterprises. A similar memorandum, drafted to address fears relating to money laundering statutes, provided guidance to institutions that desired to finance marijuana businesses.
Notwithstanding these memorandums, significant uncertainty and risk still exist in states where the state and federal criminality of marijuana differs. Cases involving these DOJ pronouncements have not interpreted them as binding or a defense to federal marijuana prosecutions. The current administration, moreover, has promised increased federal enforcement, at least where recreational marijuana is concerned. The administration has also established a task force and a marijuana subcommittee to perform a comprehensive review of the federal government’s current treatment of marijuana legalization. The subcommittee’s review and report are due by the end of July 2017.
The uncertainty surrounding federal prosecution similarly surrounds the enforceability (and future availability) of insurance for the cannabis industry. Marijuana businesses need property and liability coverage, among others, to insure the many and varied risks associated with the cultivation, distribution, and retail sale of medical and recreational marijuana. Not surprisingly, many of these risks are the same or similar to those associated with “traditional” businesses that grow or manufacture products sold to the public. For example, marijuana businesses are seeking property coverage for damage or destruction to the marijuana plant during growth or transport, theft, physical damage to the location where marijuana is grown, and business interruption and extra expense coverages. Businesses are also seeking liability insurance for bodily injury and property damage claims arising from the personal ingestion of marijuana, claims that the marijuana user may have injured another person, and related losses.
The high demand and need for insurance, however, does not meet the supply. Many insurers are reluctant to become entangled with marijuana dispensers because of the continued threat of federal prosecution. The lack of available insurance is critical to the cannabis industry’s survival because, without it, most states will not allow distributors or dispensaries to operate. Certain states, like Washington, for example, require a marijuana licensee to carry a minimum of $1 million of comprehensive general liability insurance for bodily injury and property damage claims arising out of “licensed conduct.” The statute specifically requires coverage for damage “arising out of the licensee’s premises/operations, products, and personal injury” issued by an A - Class VII rated insurer (or better) that names the state as an additional insured. Failure to secure this insurance may result in the business losing its license. Other states, including Massachusetts, enforce similar insurance requirements.
The growth of the legalized marijuana business does not seem to be slowing down even in the midst of risk and uncertainty. A harder stance on legalized marijuana growth and distribution from the current administration, however, may change the landscape dramatically. It remains to be seen if the current administration will abandon the DOJ’s priority of enforcement in favor of more strict federal prosecution, and whether that shift will affect the legalization of both medical and recreational marijuana use.