With cannabis use getting closer than ever before to becoming legal nationwide either medicinally or recreationally, Admiral Insurance Company’s Vice President of Cannabis Underwriting Keith Distel presented to attendees of the Texas Surplus Lines Association Mid-Year Meeting in Vail, Colorado, the highlights of insuring the cannabis industry.

There are two general categories of cannabis: hemp/CBD (cannabidiol), and marijuana/THC (tetrahydrocannabinol). “Hemp/CBD was legalized by the 2018 Farm Bill, and CBD derived from hemp is FDA approved,” Distel said. “Hemp/CBD is not psychoactive,” Distel added. CBD with less than 0.3 percent THC derived from marijuana is legal in many states.

Marijuana/THC is a “schedule one narcotic according to the Federal Illegal-Controlled Substance Act” even though marijuana/THC has been legalized in most states. “Only four or five states have not legalized marijuana/THC either medicinally or recreationally,” Distel told attendees. Another difference between hemp/CBD and marijuana/THC is that marijuana/THC “gets you high.”

Medicinal cannabis can be used to treat chronic pain, multiple sclerosis, cancer pain and posttraumatic stress disorder (PTSD). In states that have legalized medicinal cannabis, it is regulated as a pharmaceutical. In addition, accessibility and patient access is controlled.

Recreational cannabis helps with relaxation and anxiety. The amount of cannabis that is allowed to be possessed for recreational use varies from state to state. “Illinois allows about an ounce of dried cannabis flowers while New Jersey’s limit is six ounces,” Distel said.

The recreational cannabis industry was classified as an essential last year during the Covid lockdown. “That classification was a watershed moment for the cannabis industry,” Distel said. “The cannabis industry grew exponentially during the Covid lockdown,” he added.

Recreational cannabis is “more than just joints” but is available in a vast array of products: candies, beverages, topical creams, sublingual (applied under the tongue), vaping devices, concentrates, and inhalers.

Distel estimates that in 10 to 15 years, all cannabis will be legal recreationally.

While states are legalizing cannabis, “the federal government is good at sending mixed signals,” Distel said. According to Distel, the Cole-Ogden memos of 2009 and 2013 provided that cannabis operators operating in a state that has legalized cannabis use, and businesses doing business with the Cannabis operators will be free from federal prosecution as long as the businesses are following the letter of the law in the state.

Currently there is proposed legislation in the U.S. House and Senate that will protect cannabis operators and businesses that do business with cannabis operators. The CLAIM and SAFE Acts will provide protections for insurance, banking, and financial institutions. “The passage of these acts will provide significant changes to the insurance landscape,” Distel said.

Distel told the audience that with state legalization, “there is no single approach or standard.” Acceptance of legalization increased  following 2020 state legislative elections. In 2021, “New York, Virginia, New Mexico and Connecticut legalized recreational cannabis,” said Distel. In Mississippi, voters approved recreational marijuana, but the state Supreme Court overturned the referendum results.

In Texas, marijuana is medically legal through a compassionate use program. Doctors can prescribe low-THC medical cannabis to patients with limited, qualifying illnesses. Recently passed HB 1535 increases THC levels from 0.5 percent to 1.0 percent, plus added cancer and PTSD to qualifying illnesses. HB 1535 goes into effect Sept. 1. Marijuana possession is still a felony offense in Texas with “no change in sight.”

The coverage is less available for cannabis operators, than for other cannabis stakeholders, said Distel. Operators can be fined, raided, vandalized, and subject to theft.

Cannabis insurance covers: cultivators/growers, who grow the product from seed, dry it and send it off; manufacturers/processors/extractors; distributors; dispensaries; vertically integrated operators and companies that are “seed to sale”; testing labs, labs testing the cannabis for molds and trace metals; transporters/security firms; on-site consumption dispensaries; cannabis adjacent operations, lessor risk for landlords of dispensaries, and special events.

Insurance for cannabis operations is currently written through U.S. domiciled carriers, but there are fewer than 20 carriers that write cannabis insurance in the U.S. market. “Capacity is limited and pricing is high,” Distel said.

There are various types of insurance coverages that are needed by cannabis operators: general liability, property (crop, theft, and crime), inland marine, professional/D&O, workers’ compensation, employment practices liability insurance, commercial auto/hired non-owned auto, and product recall.

“What do we look for when underwriting a cannabis operation? The dirty little secret is that the states do most of the underwriting for us because the operation must be fully vetted before the state will issue an operating certificate,” Distel said.

Distel expects that if the federal government loosens federal restrictions on the cannabis industry, it will increase capacity in the market, open up reinsurance markets, and spur foreign investment. “The cannabis industry is dynamic and ever evolving, and innovation is a must for early adopters in the insurance space,” Distel said.