Marijuana liability

The Contradictions of Marijuana

Until the marijuana industry is federally decriminalized, banks and most insurers will remain on the sidelines.
By: | October 1, 2015 • 7 min read

It’s an industry that could soon be worth upwards of $40 billion per year, yet its key participants can’t get hold of either a bank loan or a credit card. Welcome to the paradox that is the legal marijuana business.

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Marijuana (cannabis) is a divisive substance; scourge of society and red hot investment; illicit high and essential medication; crime and cure. Whatever your opinion, the drug is already big business, and on the cusp of even bigger things.

“This is a murky and historic time period,” said Steve Gormley, chief business development officer at OSL Holdings, which offers financial management and financing for cultivators and dispensaries of legal marijuana across the United States.

“Just like the alcohol industry three or four years before prohibition was repealed, there are potentially enormous rewards, but without federal backing there is a higher risk level,” he said.

It’s already legal to cultivate and sell marijuana for medicinal purposes in 27 states, and for recreational use in four plus the District of Colombia. Yet at the federal level, the drug is still rated as a Schedule I illegal substance, alongside the likes of heroin and cocaine.

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But Gormley believes that with more than half of states permitting some kind of legal trade and 11 more likely to follow suit in the very near future, the tipping point has been reached, and decriminalization is “inevitable” in the next five to seven years.

Barred from Banking

Until that day comes, cultivators, dispensaries and other marijuana businesses find themselves cut off from the banking system. Funding the production and sale of a Schedule I drug, regardless of its legality in certain states, skirts too dangerously close to money laundering for any mainstream banks to go near the industry.

Credit unions offer one source of finance, while companies like OSL also attract investment from high net worth individuals and other investors with the appetite for high risk, high reward opportunities. But on a day-to-day basis, many marijuana cultivators and dispensaries have little choice but to operate as cash businesses, escalating the risk of theft.

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Matt Gunther, insurance agent, Cannarisk

“These operators can be carrying tens of thousands of dollars in cash and product, and the location of facilities is made public by the states, adding to the risk,” said Matt Gunther, an insurance agent at Seattle-based specialist broker Cannarisk.

Gunther noted, however, that recent legislation in some states will now permit third-party vendors to offer armored transportation services, reducing the risk of theft and allowing cultivators to transfer some risk to the security firms.

Gormley said that the absence of banks could also present some operators with problems when it comes to selling their businesses to acquirers after years of self-reporting.

“In a cash-only environment, states in which marijuana is legal have to rely on the retail operators and cultivators to report their own earnings and furnish sales receipts. Underreporting of revenue is common, but some operators who may want to go corporate in the future might not have accurate sales figures to create
stable valuation metrics for their potential acquirers,” he said.

“More savvy operators who have a view on being acquired by a major multinational and developing a brand need to follow the letter of the law and pay their taxes so that they are in a position to present a genuine valuation on their business.”

The risk landscape will improve significantly for marijuana businesses if and when the drug is eventually downgraded to Schedule II.

“Just like the alcohol industry three or four years before prohibition was repealed, there are potentially enormous rewards, but without federal backing there is a higher risk level.” – Steve Gormley, chief business development officer, OSL Holdings

“That’s when banks and institutional money will come off the sidelines in the U.S. and invest directly in retail cultivation, where all the money is,” said Gormley. “The floodgates will open and the banks will be in a mad dash to get involved. It’s a huge business and they are all investigating how to position themselves to capitalize on a nascent industry — a Greenfield, if you pardon the pun.”

Insurance Challenges

But it’s not just banks that have so far steered clear of the sector. While a handful of insurance carriers do service the legal marijuana sector (and the number is slowly growing) the majority of major insurers do not. And industry insurance buyers were dealt a blow in May of this year when the Lloyd’s market — until recently a key provider of specialist coverage for the sector — instructed its underwriters to cease insuring the industry until marijuana is decriminalized at the federal level.

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The market’s self-imposed ban is comprehensive, extending to crop, property and liability cover for those who grow, distribute or sell any form of marijuana, as well as cover for banking or related services provided to these operations.

A Lloyd’s spokesperson told Risk & Insurance® that as long as marijuana is listed as a Schedule I drug under U.S. federal law, Lloyd’s is concerned about impeding federal anti-money laundering (AML) laws, adding: “Lloyd’s will continue to monitor developments under U.S. law and will reconsider this position if and when the conflict of laws is resolved.”

Insurers are also wary of the lack of loss data and legal precedents stemming from the marijuana business. “In other industries, insurance agents create risk management strategies to properly indemnify their clients from loss interpreted and measured in case law. Marijuana commerce-related risks are completely unchartered with no precedent,” said Gunther.

“Marijuana commerce-related risks are completely unchartered with no precedent.” — Matt Gunther, insurance agent, Cannarisk

From heightened theft risk to public health concerns, there is little or no loss history in the marijuana industry, and insurance buyers are at the mercy of a small band of wary, first-mover insurers offering limited capacity, low limits, high deductibles and inflated premiums.

The lurking giant of a risk that scares insurers the most, Gunther said, is the public liability risk posed by carcinogens. While both medical and recreational marijuana must undergo extensive testing before being cleared for human consumption in states in which the drug is legal, Gunther said the industry has “all the right variables in place for class-action lawsuits.”

“There don’t seem to be clear studies on whether years of consumption can lead to lung cancer or inhalation diseases of some sort. With legal structures in place, plants are tracked from seed to sale, and it is easy to find where a certain plant was produced.

“Information is public so law firms could easily collect the necessary statistics they need to file a class-action lawsuit — it could be the tobacco industry all over again, but without the hoops of filing subpoenas to do so,” he said.

Gunther noted that some of this risk is transferred from cultivators to the third-party laboratories tasked with carrying out the tests on marijuana products, but the potential for laboratories to make mistakes still exists and the industry as a whole is potentially exposed.

“Getting insurers to provide product liability coverage has been extremely difficult. The policies aren’t priced as accurately as they probably could be, but we don’t expect them to be with uncertainty over what the loss future entails,” he said.

“Marijuana businesses will continue to pay higher premiums until losses and precedents become more established.”

Weed and the Workplace

Workers’ compensation coverage is also proving elusive for many cultivators due to the high perceived risk of explosion at certain facilities.

“Here in Washington State, we have a state-funded workers’ compensation system, but finding private sector carriers in other states who accept workers’ compensation has been one of our biggest challenges,” Gunther said.

While the cultivation of cannabis plants carries no more risk than most manufacturing endeavors, the extraction of chemical concentrates can be dangerous if done with butane-powered machinery, he said. The risk of explosion can, however, be mitigated or reduced by using alternative fuels such as CO2 or solvent-free means, as well as by implementing proper ventilation and safety protocols.

The problem for insurers, said Gunther, once again lies in a lack of loss data.

“[Insurers] may be influenced by what they learn from the hysteria-leaning media, which isn’t always the facts. But there is a big opportunity for workers’ compensation carriers to come into this industry and we wish they would do so more aggressively,” he said, adding that private sector carriers could potentially learn more about these risk exposures through collaboration with state-funded insurers.

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Indeed, as more is learned about marijuana risks and more carriers enter the market, conditions should improve for cultivators and dispensaries, but education is vital, and brokers and the marijuana companies themselves both have a role to play.

If Gormley is correct, and federal legalization is an inevitability, it won’t be long before the banks open their doors to the sector, and insurers won’t be far behind.

“Lloyd’s’ exit certainly hasn’t held back other carriers,” said Gunther. “A handful do exist and more are entering the arena. It is just a matter of time.”

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Lead Story

Improving the Claims Experience

Insureds and carriers agree that more communication can address common claims complaints.
By: | January 10, 2018 • 7 min read

Carriers today often argue that buying their insurance product is about much more than financial indemnity and peace of mind.

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Many insurers include a variety of risk management services and resources in their packages to position themselves as true risk partners who help clients build resiliency and prevent losses in the first place.

That’s all well and good. No company wants to experience a loss, after all. But even with the added value of all those services, the core purpose of insurance is to reimburse loss, and policyholders pay premiums because they expect delivery on that promise.

At the end of the day, nothing else matters if your insurer can’t or won’t pay your claim, and the quality of the claims experience is ultimately the barometer by which insureds will judge their insurer.

Why, then, is the process not smoother? Insureds want more transparency and faster claims payment, but claims examiners are often overburdened and disconnected from the original policy. Where does the disconnect come from, and how can it be bridged?

Both sides of the insurer-insured equation may be responsible.

Susan Hiteshew, senior manager of global insurance and risk management, Under Armor Inc.

“One of the difficult things in our industry is that oftentimes insureds don’t call their insurer until they have a claim,” said Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“It’s important to leverage all of the other value that insurers offer through mid-term touchpoints and open communication. This can help build the insurer-insured partnership so that when a claim materializes, the relationships are already established and the claim can be resolved quickly and fairly.”

“My experience has been that claims executives are often in the background until there is an issue that needs addressing with the policyholder,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America.

“This is unfortunate because the claims department essentially writes the checks and they should certainly be involved in the day to day operations of the policyholders in designing polices that mitigate claims.

“By being in the shadows they often miss the opportunity to strengthen the relationship with policyholders.”

Communication Breakdown

Communication barriers may stem from internal separation between claims and underwriting teams. Prior to signing a contract and throughout a policy cycle, underwriters are often in contact with insureds to keep tabs on any changes in their risk profile and to help connect clients with risk engineering resources. Claims professionals are often left out of the loop, as if they have no proactive role to play in the insured-insurer relationship.

“Claims operates on their side of the house, ready to jump in, assist and manage when the loss occurs, and underwriting operates in their silo assessing the risk story,” Hiteshew said.
“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.”

Both insureds and claims professionals agree that most disputes could be solved faster or avoided completely if claims decision-makers interacted with policyholders early and often — not just when a loss occurs.

“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.” – Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“Communication is critically important and in my opinion, should take place prior to binding business and well before a claim comes in the door,” said David Crowe, senior vice president, claims, Berkshire Hathaway Specialty Insurance.

“In my experience, the vast majority of disputes boil down to lack of communication and most disputes ultimately are resolved when the claim decision-maker gets involved directly.”

Talent and Resource Shortage

Another contributing factor to fractured communication could be claims adjuster workload and turnover. Claims adjusting is stressful work to begin with.

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Adjusters normally deal with a high volume of cases, and each case can be emotionally draining. The customer on the other side is, after all, dealing with a loss and struggling to return to business as usual. At some TPAs, adjuster turnover can exceed 25 percent.

“This is a difficult time for claims organizations to find talent who want to be in this business long-term, and claims organizations need to invest in their employees if they’re going to have any success in retaining them,” said Patrick Walsh, executive vice president of York Risk Services Group.

The claims field — like the insurance industry as a whole — is also strained by a talent crunch. There may not be enough qualified candidates to take the place of examiners looking to retire in the next ten years.

“One of the biggest challenges facing the claims industry is a growing shortage of talent,” said Scott Rogers, president, National Accounts, Sedgwick. “This shortage is due to a combination of the number of claims professionals expected to retire in the coming years and an underdeveloped pipeline of talent in our marketplace.

“The lack of investment in ensuring a positive work environment, training, and technology for claims professionals is finally catching up to the industry.”

The pool of adjusters gets stretched even thinner in the aftermath of catastrophes — especially when a string of catastrophes occurs, as they did in the U.S in the third quarter of 2017.

“From an industry perspective, Harvey, Irma and Maria reminded us of the limitations on resources available when multiple catastrophes occur in close succession,” said Crowe.

“From independent and/or CAT adjusters to building consultants, restoration companies and contractors, resources became thin once Irma made landfall.”

Is Tech the Solution?

This is where Insurtech may help things. Automation of some processes could free up time for claims professionals, resulting in faster deployment of adjusters where they’re needed most and, ultimately, speedier claims payment.

“There is some really exciting work being done with artificial intelligence and blockchain technologies that could yield a meaningful ROI to both insureds and insurers,” Hiteshew said.

“The claim set-up process and coverage validation on some claims could be automated, which could allow adjusters to focus their work on more complex losses, expedite claim resolution and payment as well.”

Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Predictive modeling and analytics can also help claims examiners prioritize tasks and maximize productivity by flagging high-risk claims.

“We use our data to identify claims with the possibility of exceeding a specified high dollar amount in total incurred costs,” Rogers said. “If the model predicts that a claim will become a large loss, the claim is redirected to our complex claims unit. This allows us to focus appropriate resources that impact key areas like return to work.”

“York has implemented a number of models that are focused on helping the claims professional take action when it’s really required and that will have a positive impact on the claim experience,” Walsh said.

“We’ve implemented centers of excellence where our experts provide additional support and direction so claim professionals aren’t getting deluged with a bunch of predictive model alerts that they don’t understand.”

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners.” — Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Many technology platforms focused on claims management include client portals meant to improve the customer experience by facilitating claim submission and communication with examiners.

“With convenient, easy-to-use applications, claimants can send important documents and photos to their claims professionals, thereby accelerating the claims process. They can designate their communication preferences, whether it’s email, text message, etc.,” Sedgwick’s Rogers said. “Additionally, rules can be established that direct workflow and send real time notifications when triggered by specific claim events.”

However, many in the industry don’t expect technology to revolutionize claims management any time soon, and are quick to point out its downsides. Those include even less personal interaction and deteriorating customer service.

While they acknowledge that Insurtech has the potential to simplify and speed up the claims workflow, they emphasize that insurance is a “people business” and the key to improving the claims process lies in better, more proactive communication and strengthening of the insurer-insured relationship.

Additionally, automation is often a double-edged sword in terms of making work easier for the claims examiner.

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners,” Holden said.

“So while the intent is to make things more streamlined for claims staff, the byproduct is that management assumes that examiners can now handle more files. If management carries that assumption too far, you risk diminishing returns and examiner burnout.”

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By further taking real people out of the equation and reducing personal interaction, Holden says technology also contributes to deteriorating customer service.

“When I started more than 30 years ago as a claims examiner, I asked a few of the seasoned examiners what they felt had changed since they began their own careers 30 year earlier. Their answer was unanimous: a decline in customer service,” Holden said.

“It fell to the wayside to be replaced by faster, more impersonal methodologies.”

Insurtech may improve customer satisfaction for simpler claims, allowing policyholders to upload images with the click of a button, automating claim valuation and fast-tracking payment. But for complex claims, where the value of an insurance policy really comes into play, tech may do more harm than good.

“Technology is an important tool and allows for more timely payment and processing of claims, but it is not THE answer,” BHSI’s Crowe said. “Behind all of the technology is people.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]