The Long-Term Risks of Cannabis Businesses to Insurers

Some insurers see legalized cannabis as an opportunity to expand market share and increase revenues; others see it as a potential path to higher losses and lower profits. Both types of carriers face a key uncertainty: product liability. Even if marijuana were legalized at the federal level tomorrow, this uncertainty would remain for years, possibly decades.

The question of product liability

Although people have been consuming marijuana in various forms for at least 2,500 years,¹ many questions remain about how cannabis and its derivatives affect human health and safety, especially over the long term.

Cannabis is classified by the U.S. federal government as a Schedule I drug under the Controlled Substances Act and has held that classification since 1971.² Schedule I drugs are those “with no currently accepted medical use and a high potential for abuse.”³

Examples of other schedule I drugs are heroin, ecstasy and LSD. Many proponents of marijuana legalization contend that cannabis is inappropriately scheduled, but a 2016 attempt to reschedule the drug failed.⁴

Marijuana’s Schedule I status creates something of a Catch-22 when it comes to understanding the drug’s long-term impacts. The determination that a substance has “no currently accepted medical use” is what differentiates Schedule I substances from those farther down the schedule:

Schedule II drugs, which are “drugs with a high potential for abuse,” such as cocaine, methamphetamine, oxycodone and Ritalin.
Schedule III drugs present “low to moderate potential for physical and psychological dependence” and include anabolic steroids, ketamine and some preparations of codeine.
Schedule IV or V drugs have less potential for abuse. Schedule IV includes Valium and Ambien; Schedule V includes Robitussin AC, a cough syrup with codeine.⁵

Because cannabis is Schedule I, conducting research on its potential health benefits, if any, requires complying with strict regulations.⁶ Researchers have found that getting approval for studies of marijuana and derivatives is time-consuming, costly and difficult.⁷

Marijuana’s scheduling also prevents many institutions that would typically conduct medical research — colleges, universities and other institutes of higher education — from doing so because allowing illicit substances on campus puts them at risk of losing federal funding.⁸

Both public and private colleges and universities receive federal funding, and the amounts are often substantial. For example, private Dartmouth College received more than $154 million in 2018 from the federal government. Gonzaga University, also private, received more than $60 million, and the University of California, Santa Cruz, a public school, received $190 million in federal funding in 2018.⁹

The federal government's classification of cannabis as a Schedule I drug means only limited data is
available on its long-term effects, which raises potential product liability risk for insurers.

Related:
Three Hidden Risks of Cannabis Businesses

Limited research means limited data for insurers

These barriers to research mean there are fewer rigorous studies on marijuana’s effects than there would be if it were elsewhere on the schedule. Yet, these rigorous studies — those that are double-blind, placebo-controlled, randomized and peer-reviewed — would play an important role in determining whether marijuana does have potential medical use and in better understanding its long-term health effects.

Much of the currently available data on the effects of marijuana is developed using less rigorous methods and is therefore at least somewhat inconclusive. For example, studies could survey long-time marijuana users and non-users and then compare the two groups along a variety of health measures. These studies can’t control for variations in potency from place to place or over time, and research indicates marijuana may be more potent now than it was in the 1990s.¹⁰

These studies also can’t easily account for potential confounding factors. For instance, it’s possible that smoking marijuana causes lung cancer because marijuana smoke contains more of some carcinogens than cigarette smoke does. And, when people smoke marijuana, they usually inhale more deeply and hold the smoke in their lungs longer than when smoking cigarettes. But many people consume both marijuana and tobacco, making it challenging for researchers to draw a clear link between smoking marijuana and lung cancer.¹¹

If cannabis were rescheduled or legalized at the federal level, research would become easier to conduct and could begin generating more reliable information about the impacts of marijuana use. Even then, it could take years or decades for doctors and scientists to draw clear conclusions from that information.

For insurers, these challenges translate into a limited amount of data on product liability risk. Limited data makes it harder to estimate the cost of potential future claims, which in turn makes it harder to make underwriting and pricing decisions today.

scientist observes liquid solution with a microscope Researchers looking to study marijuana and its derivatives face multiple obstacles,
which limits what we know about long-term health impacts.

Related:
Cannabis Property Risk: What Underwriters Need to Know

The importance of knowing your cannabis risk

Whether you’re seeking to insure or to avoid cannabis businesses, it’s essential for you to know which businesses in your book are likely growing, processing or retailing cannabis products.

Insurers that would prefer to avoid writing cannabis businesses can use this information to make informed decisions about renewals. Insurers who see covering cannabis businesses as an opportunity can use this information to rewrite exclusions and determine prices that make sense for their business.

Even insurers who want to cover cannabis businesses may want to exclude product liability from the policies they write. In multiple instances in the past, an insurer that covered a business for product liability, even for a short time period, still faced claims and lawsuits years after the business switched to another carrier. Asbestos is a prime example. Exposure has triggered thousands of legal claims and cost insurers and reinsurers between $55 billion and $65 billion.¹²

Cannabis risk can easily enter your book without your underwriters knowing. In some cases, a business applies for insurance while engaged in operations unrelated to cannabis. Later, the business switches to growing, producing or retailing cannabis without notifying its insurance agent or carrier. For example, a factory owner gets insurance when the building is used for fabricating stone countertops. Later, the factory starts processing cannabis into hash oil, which creates fire and explosion risk, but the owner doesn’t alert the insurer.

Businesses can also enter your book when they are already growing, processing or retailing cannabis if they don't provide complete or accurate information on the application. Underwriters can look online for additional information, but what’s available may not be accurate or updated. Or, it may be difficult to interpret. Cannabis processors typically operate in unmarked facilities that look, from the outside, similar to other commercial buildings. If an underwriter looks up the business address using an online mapping application, the street view images will likely not reveal what’s happening inside the building.

How to quickly identify the cannabis risk in your book

To identify these businesses, you could manually comb through your book of business every few months, doing online research and contacting each business owner. But this process is time-consuming, tedious and, as noted above, may not yield accurate results.

You need a faster, easier way to find the cannabis risk in your book. That’s why we developed BuildingMetrix Cannabis Check, which gives you an accurate look at the cannabis risk in your book. You submit data on your insured’s addresses and get results in just a few business days. Your teams can start making the right decisions for your business without spending hours and hours reviewing thousands of policies.

If you’re a WSRB Subscriber, access to BuildingMetrix Cannabis Check data for Washington state is included in your subscription. Data for other states is available for an additional, affordable fee. Contact us today to learn more.