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Insuring the Medical Marijuana Industry in the Alternative Risk Marketplace

Medical Marijuana
October 27, 2016

According to the National Conference of State Legislatures, “a total of 25 states, the District of Columbia, Guam and Puerto Rico now allow for comprehensive public medical marijuana and cannabis programs. Another 17 states allow the use of low tetrahydrocannabinol (THC), high cannabidol (CBD), products for medical reasons in limited situations or as a legal defense.” An additional four states have 2016 ballot measures to permit medical use for certain conditions, such as cancer and chronic pain. 

In May 2012, Connecticut passed a medical marijuana law (Public Act No. 12–55). A pharmaceutical framework for a medically focused program was created, which allowed the following.

  • Palliative use of marijuana by seriously ill patients
  • Immunity from criminal and civil penalties for patients and their caregivers, physicians, and market participants
  • Establishment of licensing and operational requirements for producers and dispensary facilities (and their employees)
  • Restrictions to be placed on advertising and external displays to prevent improper steering of patients and prevent negative impacts on local communities
On October 1, 2016, the Connecticut State Legislature passed Public Act No. 16–23. This law essentially expanded Public Act No. 12–55 No. to include the following.
  • Registration of minors as patients under very limited circumstances and restrictions
  • Delivery to inpatient care facilities, such as hospice
  • Extension of legal protection to nurses
  • Establishment of a framework for Connecticut-based research

From May 2014 to October 2016, the number of patients enrolled in the program has grown from less than 2,000 to almost 14,000. Likewise, the number of participating physicians has increased from around 150 in May of 2014 to more than 540 in October of 2016. These two public acts have imposed a number of responsibilities, requirements, and restrictions on all involved parties—from patients and caregivers to nurses, physicians, and dispensing facilities.

The Connecticut Captive Insurance Association (CCIA) has recognized that this new medical marijuana industry, even with all the requirements and restrictions imposed by Public Act Nos. 12–55 and 16–23, will pose multiple risks to all participants and the general public. At their Annual Symposium in Stamford, Connecticut, on October 12 and 13, the CCIA took on the challenges of insuring the medical marijuana industry. In one of the last sessions—a panel that included Jonathan A. Harris, commissioner of the Connecticut Department of Consumer Protection; Rodman (Rick) Black, senior vice president of William Gallagher Associates; Thomas J. Nicholas, founder and CEO of Prime Wellness of Connecticut; and Thomas F.X. Hodson, director and general counsel, SOBC Corporation (as moderator)—the panelists discussed the challenges and solutions in the alternative risk marketplace for this volatile new industry.

Using a power point presentation, the panel began with a review of the two acts and their subsequent implementation. The discussion continued with an explanation of why physicians, as gatekeepers to patient registration, are a key to maintaining program integrity. Another key link, how patients access medical marijuana, was identified. Everything from producers to dispensing facilities was reviewed, including how the plants are grown, processed into various forms, packaged, and labeled. Every step along the way, every grower, producer, dispensing facility, and medical provider must be licensed and follow stringent regulations.

In the second half of the session, Mr. Black discussed the challenges to insuring the medical marijuana industry. He identified seven specific challenges.

  • It is a newly emerging, fast-growing industry.
  • The U.S. Federal Government has marijuana as a schedule 1 drug, meaning that transportation across state lines can result in federal criminal prosecution.
  • 22 states and D.C. allow for medical marijuana growth and distribution; however, differences in regulations exist between states.
  • Marijuana is a product that lacks sufficient U.S. research regarding medical benefits.
  • A myriad of insurance coverages will be needed to manage the broad range of exposures and risks faced by growers, dispensers, and others in the industry (e.g., workers compensation, property, crop, general liability, professional liability, D&O, crime, transit, auto, cyber, etc.).
  • U.S. domestic insurers are, for the most part, standing on the sidelines citing shareholder perception concerns and federal government concerns. (Lloyd’s of London withdrew from offering future coverage for the U.S. marijuana industry until the U.S. Federal Government changes its position.)
  • There is a lack of insurance market availability, capacity, and coverage that adequately addresses the exposures to loss for the industry. A lack of historical, credible loss data is often cited as one of the reasons.
  • In view of the lack of traditional insurance availability, what potential alternative risk solutions exist that can provide a viable solution?

A discussion of captive insurance as the answer to the final challenge ended the session. Mr. Nicholas began with a general review of captive insurance, including a definition, the different types, and the insurance objectives of a captive program. The discussion then launched into the specifics for the medical marijuana industry. He broke it into three categories: businesses, which included everything from cultivation facilities to dispensaries; exposures, such as fire, vandalism, and theft; and the types of coverage needed, such as workers compensation, professional and general liability, product and cyber-liability, and business interruption.

According to the 2016 Fortune Magazine article "Legal Marijuana Sales Could Hit $6.7 Billion in 2016," written by Tom Huddleston, Jr., by the end of 2016, the sale of legal marijuana, which includes the medical marijuana industry, is expected to grow to $6.7 billion. And it is expected to grow by 300 percent over the next 4 years. This is an opportunity for the captive insurance industry to step in, be the leader, and offer this emerging industry the risk solutions it needs.
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