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AM Best Report Explores Cannabis-Related Opportunities, Risks for Insurers

Best's Special Report: Cannabis: New Opportunities for Insurers, But With Burgeoning Risks

An A.M. Best Special Report, titled, "Cannabis: New Opportunities for Insurers, But With Burgeoning Risks," states that both medical and recreational marijuana are a rapidly growing business, with revenue that rivals popular industries in the United States such as coffee and movie tickets. In 2017, sales of legal marijuana reached $8 billion ($5 million medical and $3 million recreational), while sales of illegal marijuana reached an estimated $42 billion. With a growing number of states voting to legalize marijuana, the market for legal marijuana sales is projected to increase to $22 billion, and illegal marijuana sales, to decrease to less than $5 million, by 2022, according to the report. Moves to expand the availability of medical and legalized recreational marijuana, coupled with projected future growth, position the industry as an emerging market for insurance carriers, according to a recent AM Best report

Despite the industry's rapid growth, the integration of marijuana coverage for carriers has been slow and steady.  

One key challenge for businesses (and insurers) is deciding which coverage is needed-or not needed. Most marijuana businesses need general liability and product liability coverages, as well as property liability coverage, to protect against accidents and injuries that occur on a business's premises.

However the available limits may be inadequate for marijuana businesses owners, who may need higher aggregate limits. Because this is an emerging market, insurers believe that risk in these businesses is best managed with their current limits. Another reason for the low limits is the challenge of finding reinsurers to back marijuana-related books of businesses, as reinsurance is typically a separate book or tower to cover these risks. Other problems for business owners are the shared limits between general liability and product liability, as well as non-stacking endorsements, which limit the amount of coverage available to an insured. Many of these policies also lack a duty to defend-a significant issue for marijuana businesses.

The growth of the marijuana industry will impact other insurance segments: homeowners, commercial property, automobile, and workers compensation.

Key Property/Casualty Insurance Concerns Regarding Legalized Use of Marijuana

By Line of Coverage

Coverage Line

Concerns

Homeowners

> Increased risk profile for policyholders that grow marijuana

> Uncertainty over how well equipped electrical systems in homes are to handle the power necessary to safely operate an in-home growing facility

>Potential disputes for classifying marijuana-related property as personal property vs commercial property

Commercial Property

> Substantial fire risks associated with complex apparatus and electrical configurations for commercial-scale marijuana growing facilities

> Significantly heightened risk profile due to burglary and theft

> Higher fire and vandalism risk for landlords and insurers of landlords owing to the operations of tenants in marijuana business; higher exposure to burglary, theft, or vandalism loss to neighboring tenants who aren't involved in the business owing to their proximity to the business

Automobile

> Higher claims collision frequency in states where marijuana is legalized

> Dramatic increases in claims adjustment and defense and cost containment expenses for auto claims due to the difficulty of definitively identifying impairment caused by marijuana use as the proximate cause of an accident

> For personal injury protection (PIP) or "no fault" coverage that pays for incurred medical expenses regardless of cost, complications in claims settlement when reimbursement for injuries includes the obligation to reimburse for prescribed marijuana stemming from a motor vehicle accident

> Exposures for commercial auto (and/or inland marine) insurers covering the transport of cannabis as motor/truck cargo

Workers' Compensation

> Question of whether workers' compensation will cover medical marijuana when prescribed by a physician, or whether marijuana treatment should be excluded from workers' compensation will be a key issue for workers' compensation insurers

> The difficulty of settling claims to determine whether employees who sustained injuries on the job were under the influence of marijuana at the time, given the challenge of testing for accurate marijuana intoxication levels

> Marijuana as a viable alternative for opioids for pain relief still undetermined and highly controversial

Source: AM Best data and research