The Cannabis Captive

Captive insurance for cannabis could be a viable option.
By: | March 5, 2018 • 4 min read

Estimated to be worth $20 billion by 2025 and to employ tens of thousands of people, the rapid growth of the cannabis industry is driven by states such as Colorado, Oregon and Washington. With California the latest state to legalize and 12 more considering following suit, that growth will only increase.


However, problems exist. Cannabis is illegal under federal law, despite being legal to cultivate and sell medical marijuana in 29 states and recreational marijuana in nine. Many large players, including Lloyd’s of London, have pulled out of the market.

Added to that are the tough safety and regulatory measures and a lack of historical loss data. The end result for cannabis growers and dispensaries has been scarcity or prohibitively high costs of traditional insurance market coverage.

That lack of coverage was laid bare by last September’s hurricanes, which devastated cannabis operations in Florida and Puerto Rico, and the wildfires that swept through Northern California a month later.

But for those savvy cannabis entrepreneurs, a new solution is emerging. Closely-held captives, licensed in more than 30 states, can plug the coverage gap.

“This is the greatest captive opportunity of the 21st century,” said Matthew Queen, general counsel, CCO, Venture Captive Management. “Captives and risk retention groups are uniquely positioned to provide value to the cannabis community because of the unique and unknown cannabis exposures.”

Regulatory and Safety Risks

Cannabis regulation is a gray area because of differences in federal and state laws. Many carriers, particularly those that operate in multiple states, deny coverage because of the drug’s illegal status.

Matthew Queen, general counsel, CCO, Venture Captive Management

“This is a real challenge, because the large commercial carriers generally refuse to provide coverage for a federally illegal substance,” said Queen. “Regardless of the merit of the federal government’s position, this means that every individual operating in the cannabis space is either liable for violating the CSA or aiding and abetting the commission of a felony.”

Worse still, in May 2015, Lloyd’s of London, one of the cannabis industry’s biggest specialist insurers, instructed its underwriters to cease coverage until marijuana is decriminalized at the federal level. The ban had a far-reaching effect, extending to crop, property and liability insurance, as well as cover for banking-related services provided to these operations.

Lack of Coverage

The problem for cannabis businesses or landlords is that insurance can be inadequate, expensive or unavailable. Then, even with coverage, carriers will often challenge cannabis-related claims and many courts will side with them.

Marshall Gilinsky, shareholder, Anderson Kill’s New York office, who practices in the firm’s insurance recovery and commercial litigation departments, said there is anecdotal talk that insurers are hiking up premiums due to reputational and criminal risks. Because loss ratios on cannabis are often lower than those of mainstream crops, carriers can rake in larger profits, he added.

“Captives provide absolute control of the terms and conditions of the coverage and remove any questions about the enforceability of insurance contracts. Moreover, the absence of the largest commercial carriers creates a market opportunity for smaller players.” — Matthew Queen, general counsel, CCO, Venture Captive Management

“Pricing for cannabis plants is no different than, say, soya beans. But insurance companies are adding a ticker because of the risk they could get indicted for aiding and abetting or even money laundering.”

“Another problem is that brokers mistakenly sell the wrong type of coverage that excludes cannabis,” said Jeffrey Rosen, president, Tailored Benefits.

Captive Solution

A potential solution is captive insurance, or more specifically, closely-held captives (CICs). Cannabis companies can be a fit due to their strong capital position, risk appetite and entrepreneurial spirit.

Typical risks include: auto, BI, casualty, crop, commercial, cyber, general and product liability, property, surety, workers’ compensation and even armored car insurance. A captive’s coverage can extend to product recall, intellectual property, legal defense, crime and employee theft. Landlords can self-insure their property risks through a captive.


CICs are licensed insurance companies allowed, under special provisions, to sell cover to affiliated businesses but not to the general public, making them more efficient to form and operate than traditional insurance companies. They provide businesses with greater control over insurance and claims handling practices and allow them to retain underwriting profit and put it back into the business.

“Captives provide absolute control of the terms and conditions of the coverage and remove any questions about the enforceability of insurance contracts. Moreover, the absence of the largest commercial carriers creates a market opportunity for smaller players,” said Queen.

Dave Provost, deputy commissioner, Vermont’s Captive Insurance Division, was more skeptical. He said that until cannabis becomes legal at the federal level, it won’t find much of a niche in the captive market.

“If and when it does become legal, an alternative market ‘solution’ is unlikely to be necessary,” he said. “There may be opportunities for group programs in the future, but my guess is that the traditional market will be ready to step in the day after it becomes legal.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.


Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”


Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.


“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]