Nevada legalized both recreational and medical cannabis by a 2016 ballot initiative, and in doing so joined a growing number of states with similar changes in legal philosophy. As an industry trailblazer, the Silver State benefited from a $529.9 million “green” rush in taxable sales during the first fiscal year alone, with the state receiving its share of nearly $70 million in taxable revenue (enabling a substantial earmarking for education and the “Rainy Day” contingency fund). Additionally, Nevada’s boon resulted in an economic growth of $989.7 million through cannabis-based auxiliary businesses and an income increase of $443 million by virtue of the 8,300 full-time equivalent jobs created to meet industry demands.
Recreational sales began on July 1, 2017, catapulting the state into a position as one of the country’s strongest cannabis marketplaces. By economists’ predictions, Nevada will continue to be a salient leader well into the next decade; during the first seven years of the industry’s operation, experts anticipate the allocation of $1,000,000,000.00 (yes, one billion dollars) from tax revenue to the state. To support the labor demands for production, processing, and sales, the creation of more than 8,000 jobs is expected to supplement the industry.
Nevada’s cannabis-friendly policies, tourists (45 million each year in Las Vegas and Reno), and domestic investors are not the only driving forces behind the state’s success. Wasting no time after their own nation-wide all-purpose legalization in October 2017, Canadian companies are maintaining old and establishing new business relationships in Nevada as they continue to recognize the economic prospects of the state’s cannabis market. For example, a Vancouver-based company engaged in the investment of cannabis-related income-producing property and agricultural equipment already has significant investments in Nevada: a 1,000-acre cannabis farm and an additional 1,865 acres of property dedicated to CBD farming and extraction.
Recently, the company contracted with a developer to build a 1 ton per day extraction facility and with a technology company for the extraction and return of 1.5 million pounds of CBD Isolate over the course of three years. Estimates of the economic success of the hemp-CBD market alone are projected to be $22 billion by 2022. Nevada’s established business relationships and favorable disposition towards the cannabis culture guarantees its role as a major CBD market hub. Accordingly, the state may soon be an indispensable liaison between an ambitious Canada and an indecisive United States, effectively buying time for the United States to take a definitive position on the issue of legalization.
The Uninsured and Underinsured: The Effect of Uncertainty
While cannabis remains illegal under federal law, the federal government is not actively intervening with state mandates on the issue. Shares in cannabis-based companies are even available on the OTC Market, the NASDAQ, and the NYSE. However, the unpredictability of the federal government’s forthcoming position on legalization and enforcement of the same is creating palpable uncertainties and anxieties for investors, entrepreneurs, consumers, and insurance companies.
Many engaged in the cannabis market in Nevada including business owners, farmers, consumers, and investors, are exposed to substantial risk due to the apprehension of prominent insurance companies to underwrite cannabis-related coverage policies at this juncture in time. The need for insulation against loss and risk-reduction, however, is pervasive, and coverage is needed to buffer the economy through the growing pains of a developing and burgeoning market.
With the industry’s sufficient coverage, business owners could benefit from secure investments, investors could make more confident and accurate risk-benefit analyses, consumers could anticipate steady market prices, and the United States could progress with a firm foundation and competitive edge in the booming market. From the perspective of prospective carriers, however, it’s easy to understand how the uncertainties of federal law may lead to insecurity in provide coverage to Nevada’s billion-dollar industry.
Federalism: The Origin of Uncertainty
The incompatible laws between the state and federal governments serve as the origin of uncertainty. While the concept of federalism is a relatively straightforward doctrinal theory (both the federal government and Nevada share authority over the state), it is much more convoluted in practice and, specifically, in the context of legalization. Understandably, many are confused as to how cannabis can be legal at the state level and simultaneously illegal at the federal level. Intelligent questions may come to pass such as:
Am I ever going to prosecuted by the federal government for a crime if I engage in cannabis-related activities if I do so in Nevada where its legal? Should Nevada business owners consider their businesses subject to federal raid and seizure? Would a wise investor purchase stock in cannabis-based companies? Will my money be considered “dirty” if I provide personal loans to cannabis entrepreneurs?
Would it be wise for an insurance company to underwrite policies for Nevada’s cannabis market which, according to the federal government, involves illegal activity? Will the insurance companies be insulated from being implicated in federal crimes if federal law is abruptly enforced?
Caprice: The Growth of Uncertainty
To better understand why insurance companies and others have been conditioned to hesitate on becoming involved with the cannabis industry, it is helpful to understand the federal government’s recent history of indecisiveness with respect to legalization and the enforcement of federal law.
August 2013 – The “Cole Memorandum” was published by the Department of Justice. It instructed U.S. Attorneys to avoid prosecution in states where cannabis was legal in one form or another.
2016 – Presidential nominee Donald Trump took the following positions on legalization: it is ultimately a state issue, he supported medical marijuana 100%, and he thought recreational marijuana as bad. Upon winning the election, President Trump nominated Jeff Sessions, who held strong anti-cannabis beliefs, for the post of U.S. Attorney General.
May 2017 – Mr. Sessions asked Senate leaders to repeal the Rohrabacher-Farr amendment so the federal government could bypass state laws and prosecute those engaged in cultivating, distributing, or using medical marijuana. The Rohrabacher-Farr amendment, passed by bipartisan support in 2014, bars the Justice Department from using federal funds to prevent states from implementing their own laws regarding medical marijuana. Senate leaders did not grant Mr. Sessions’ request.
January 2018 – Mr. Sessions rescinded the Cole Memorandum. The repeal was ineffective in allowing prosecutors to bring charges against state legalized cannabis use because of the valid Rohrabacher-Farr amendment.
April 2018 – President Trump ordered an abrupt retreat from the announced cannabis crackdown when Senator Cory Gardner (R-Colorado) blocked Justice Department nominees in retaliation to the Cole Memorandum repeal. The President did not consult the Attorney General before the announcement.
June 2018 – President Trump stated, he would “probably” support a new bipartisan bill (the “STATES” bill) introduced by Senator Gardener and Senator Elizabeth Warren (D-Massachusetts). The bill would remove cannabis from the federal schedule of controlled substances in states where it is legal, and allow financial institutions to deal with cannabis businesses as long as those business comply with applicable state laws.
October 2018 – The FDA asked for public comments about the “abuse potential, actual abuse, medical usefulness, trafficking, and impact of scheduling changes on availability for medical use” of cannabis which is now under international review.
November 7, 2018 – Mr. Sessions resigned from his post as Attorney General at the request of President Trump. Matthew G. Whitaker was appointed as temporary Attorney General. His sentiments regarding cannabis legalization are unknown.
Insurance companies: Industry-wide needs and considerations
Whether the forthcoming position of the federal government will be a friend, foe, or neutral of legalization is unsettled. Nevertheless, the need for coverage touches the entire periphery of the cannabis industry. In considering whether to underwrite policies, insurance companies might contemplate specific challenges and opportunities in light of the current legal environment, as well as the approaches of other companies which have already taken the leap in providing coverage.
Forum shopping between state and federal courts may present a problem as can be imagined with the conflicting laws. If a party brings suit against a carrier under a homeowner’s insurance policy, whether or not the carrier will be required to payout claims will likely depend on whether the lawsuit is brought in federal or state court. For example, in 2012, the United States District Court for the District of Hawaii held a homeowner’s policy did not cover the theft of plants grown for medical use stolen from the insured’s home. While the insured’s actions were legal under Hawaii’s state laws, cannabis’ illegality under the CSA resulted in the plants’ theft not being subject to homeowner’s insurance. Had the insured brought suit in Hawaii state court, the court’s opinion may have been made in her favor.
In states with legalized cannabis, many insurers are looking to the legislatures to establish precedence for coverage. Some states, such as Oregon, are proactive with regard to pre-emptively battling these types of conflicts by including language in cannabis legislation laws to prevent insurers from denying certain claims. In other states, such as Connecticut, minimal possession limits have some carriers not bothering to defend claims. In other states, such as Colorado, some carriers take no issue with covering the loss as long as the insureds are compliant with state limits and license requirements.
In addition to forum shopping, legislative precedence, and developing protocol in the choice to defend claims, carriers may need to consider other authorities and challenges. For instance, how will modified electrical wiring and the increase in mold susceptibility due to the humidity requirements of the plant effect existing policies? How will home insurance in Nevada be managed to accommodate lawful cultivation of the plant and other relevant laws?
Cannabis-related businesses and owners are in need of general liability coverage for workplace accidents, such as customer slip and falls, which are universal liabilities applicable to nearly all brick and mortar businesses regardless of industry classification. Moreover, because of the strict banking restrictions, and lack of a standardized system due to federal regulations, these businesses are more susceptible to theft since they handle more cash. Businesses also need coverage for property damage, crop failure, and wildfires. Retailers engaged in selling edibles and infused products are in need of coverage for product liability. What about Workers’ Compensation?
Without insulation from these common occurrences, the risk of investing in a cannabis business is unreasonably high. To promote economic growth in states such as Nevada, these entrepreneurs need the fundamental protections offered to other businesses by insurance companies.
The rate of car accidents, and therefore premiums, have gone up in every state that has legalized cannabis. (Here, correlation is not intended to necessarily imply causation.). While there is no standard method of roadside detection, driving while under the influence of cannabis is undoubtedly a concern in need of address by law makers and policy underwriters. Special issues regarding auto insurance coverage may merit discussion in states such as Nevada where cannabis is legal for both medical and recreational use.
Some life insurance providers have yet to determine if the use of cannabis carries the same risk as smoking cigarettes. While some providers are offering lower rates to medical cannabis users by placing them in a different risk pool than cigarette smokers, risk assessment and corresponding premiums also depend on the severity of the condition being treated. The issue of cannabis consumption as it applies to life insurance coverage is in need of continued conversation, especially for Nevada insurers and their insureds.
Because cannabis is not an approved medical treatment according to the FDA due to its status as a Schedule 1 Substance, health insurance providers cannot reimburse patients. Therefore, insurance companies offering medical treatment options often have strict policies that may be insufficient in treating a patient’s condition. New York has introduced a bill in the Assembly that would require state public health plans, like Medicaid and Child Health Plus, to cover cannabis as a medical treatment. Could, and should, Nevada follow New York’s lead in this area?
Here again, the proclivity for mixed signals of is evident. While providers cannot reimburse patients for medical cannabis as treatment, the FDA recently approved the first cannabis-based medication which is expected to be covered by more providers as time progresses. Epidiolex, which contains CBD, treats seizure disorders, is available by prescription in all states, and has a sticker price of $32,500 for a year’s supply. How will providers of Nevada residents approach the coverage of the pharmaceutical? How will contentions regarding the lack of coverage for CBD treatment for other conditions be managed?
Could California serve as a model for Nevada?
Nevada could benefit from insurance programs similar to those recently approved by California’s Insurance Commissioner. The programs include: the first filing of a cannabis business insurance product by a commercial insurance company (November 2017); the first approval of a Cannabis Business Owners Policy consisting of property and liability coverage for dispensaries, processors, manufacturers, distributors, storage facilities, and other relevant businesses operating in the state (June 2018); and the first approval for a surety bond program for the cannabis industry (February 2018).
Additionally, in May 2018, Commissioner Jones approved the first provider in the state to add lessor’s risk coverage for property owners who are exposed to risks from tenants who use the space for commercial cannabis-activities. The package provides liability and property insurance for commercial property owners who lease building space for cannabis labs, product manufacturing, cultivation, and dispensary operations.
Nevada’s cannabis industry is in need of coverage and cannot reach its full economic potential without the help of insurance companies. While this is only one of many issues presented by the new industry, insulating our new market is the first step in protecting our stake in one of the next global economic trends. It is an opportunity for insurance companies and the country to move forward in the market as a world leader with a solid foundation.