Michigan cannabis companies should be able to readily secure the insurance coverage they need, but they face a lack of choice in the market compared to other industries.
That’s the assessment of Michigan’s insurance market from industry professionals who say that a lack of the largest carriers has overall still allowed cannabis businesses to obtain coverage.
“You may not see the same carriers providing coverage as you see in the standard market, but there are still multiple insurance carriers providing quotes,” said Alan Woznicki, an associate vice president at Grand Rapids-based insurance agency Lighthouse Group.
“It’s not like going and getting a quote for a dry cleaner or a manufacturing company with simple operations. You’re not going to have as many carriers who are going to provide quotes on that, but there are still carriers out there who do a good job,” Woznicki said.
Still, the absence of major insurance carriers in the cannabis market limits competition, “which makes things more expensive,” said John Price, vice president in the Detroit office of insurance brokerage Lockton Companies.
“And if a broker doesn’t have a relationship with one of those carriers, they can’t go out to that marketplace ... to vet those carriers against one another to try to procure the best coverage for their client,” Price said during a recent MiBiz roundtable discussion on cannabis (see page 11).
While more insurers have been entering the market as the cannabis industry grows, large carriers’ absence stems from the ongoing federal prohibition on marijuana, despite repeal efforts in Congress.
“There are very few carriers that insure cannabis for various reasons, one of them being the federal restrictions and insurance carriers being afraid of taking any dollars from this industry if they work across state lines,” said Kevin Cross, founder and chief visionary officer at the Specialty Agriculture Risk and Financial Association LLC (SARFA).
After forming in 2018, SARFA created the Specialty Agriculture Insurance Co. of Michigan, which offers policies that cover cannabis companies if a consumer is harmed by an adulterated product.
Working through independent agents and brokers, Specialty Agriculture Insurance has nearly 100 clients that hold about 300 cannabis business licenses, including growers, dispensaries, processors and testing facilities, said President John Briggs.
Specialty Agriculture Insurance recently added coverage for harm caused by a cannabis company selling to anyone who’s under 21 years old or is visibly intoxicated, Briggs said. The coverage was added after the state Legislature in July enacted a new law that allows the injured party to take action against the cannabis company. The law requires cannabis companies to carry at least $50,000 in liability coverage.
The hands-off approach by major insurance carriers follows a similar situation for banks. Large banks won’t touch the industry, leaving smaller banks and credit unions to serve cannabis companies.
While for now “there seems to be a sufficient number of insurers who are available to meet the needs of the industry,” that coverage comes from “lots of small, probably inexperienced and maybe under-capitalized, insurers and underwriters,” said Robert Hendricks, senior counsel at Grand Rapids-based Warner Norcross + Judd LLP who leads the firm’s cannabis practice.
“What we haven’t really seen yet in the industry, even nationally, is when there’s a major problem that really calls for significant insurance backing, we don’t know whether the current structure of insurance in place is going to be adequate to meet that problem,” Hendricks said during the MiBiz roundtable.
The lack of major insurance carriers in the cannabis market comes despite rapid growth for the industry in the U.S. and the market potential for insurers.
Cannabis “represents a significant missed opportunity for the insurance industry, which could issue over 100,000 policies were insurers to sell only a single policy to each active marijuana business in the U.S.,” according to a recent white paper by London-based New Dawn Risk Group Ltd.
The cannabis industry could potentially generate $1 billion in annual premium revenues “were it insured to levels normal for other businesses — with policies split across the types of business and activity,” according to the New Dawn Risk white paper.
Still, the risk of running afoul of the federal law outweighs the potential reward for major insurance carriers such as The Hartford Co. and Traveler’s Companies, according to Briggs.
“That’s not enough premium there to warrant any risk at all to them, so the smaller, independent specialty markets are the ones that are really out there doing this,” Briggs said. “It’s not enough for a big carrier to be all that excited about it, yet. It’s coming.”
One area where obtaining coverage may prove difficult for cannabis companies is directors and officers liability coverage, which has been in short supply across economic sectors, said Anne Wayman, executive vice president who leads the cannabis practice group at Alera Group, a Deerfield, Ill.-based independent insurance firm that has more than 90 locations across the U.S. and acquired Lighthouse Group in 2020.
“That’s hard to come by, not just in cannabis,” said Wayman, who’s based in Las Vegas. “Directors and officers is one of the lines of business that has shrunk capacity and increased rates that we’ve been dealing with since the pandemic and record natural disasters contributing to the limited marketing and high pricing.”