Growing Pains: Cannabis Businesses Are Thriving, but These Workers’ Comp Hurdles Remain

Cannabis is now legal for recreational use in a third of U.S. states, and for medical use in 20 more, but it is still illegal under federal law.

This paradoxical status has serious implications for the industry — including a lack of access to the federal banking system — that greatly complicates many aspects of the business, including insurability in general, and workers’ comp in particular.

One of the biggest impacts is a shortage of carriers willing to insure cannabis businesses.

“It boils down to capacity,” said TJ Frost, president of Symphony Grow and Symphony Risk Solutions.

“If we were insuring a construction company, we’d have 200 carriers that we could go to market with and get quotes and have competitive pricing, where in the cannabis space … you have anywhere from 20 to 40 carriers that will insure it. And all their rates are different. Their policy forms are different. Their offerings and their capacity are different.”

And most of those carriers are in surplus lines.

“I would say, 90% of the carriers that we’re currently dealing with are in the surplus lines market, which has its own challenges,” Frost said. “Their rates are a little bit more, and then there’s fees and taxes that are involved.”

Cannabis Challenges for Workers’ Comp

“Workers’ comp is a standardized coverage. We need more capacity, more carriers, but they’re still not willing to enter the marketplace because cannabis is not federally legal,” said Frost, who also pointed out that the industry’s regulatory oversight and specialization actually make it a fundamentally better exposure, especially in the retail, cultivation and distribution segments.

TJ Frost, president of Symphony Grow and Symphony Risk Solutions

According to Jay Virdi, chief sales officer for the Cannabis Specialty Practice Group at HUB North America, carriers cite a variety of reasons for avoiding the cannabis space.

“I’ve heard all the objections,” Virdi said. “First it’s reputational, it’s not federally legal; we have treaty exclusions and our reinsurers are not allowing this.”

He said the lack of capital and resulting high prices cause some cannabis operations to forgo adequate coverage.

Another complication is the constant risk that cannabis companies’ bank accounts can be suddenly closed or frozen, causing cancellations or necessitating rewrites.

“A number of these insureds have backup entities and FEINs that are ready to roll a new bank account just in case it gets canceled. That causes a lot of rewrite activity on our front, cancellation activity, and it’s really tough,” said Cameron Ward, vice president commercial programs at CannGen Insurance Services, LLC, where he runs the workers’ comp department.

This is particularly problematic in workers’ comp.

“It’s the number one issue that comes up when writing the workers’ comp line, just, ‘Can they keep this bank account open?’ ” said Ward, who sees multiple accounts each week needing rewrite because of problems with bank accounts.

Exacerbating the issue is that workers’ comp lines are generally based on the payroll-paying entity.

“It’s not the operating entity, it’s not the license entity, it’s specifically the entity filing the 941s that needs to be insured for workers’ comp,” said Ward. “And thus, they need to have a bank account, and that’s still really hard for these individuals to hold those bank accounts open and supply consistent payroll checks for their employees and not have to switch bank accounts and insured names and all that comes with that.”

Cannabis’ Historical Impact

Other challenges stem from the history of the cannabis industry.

“A lot of the nuances of what makes cannabis unique as an industry really has to do with the risk profile of who these operators are,” said Charles Pyform, chief marketing officer for CannGen, U.S. “A lot of them have been coming out of black markets, historically in more legacy states, like on the West Coast.”

As such, they may still be relatively new to standard business practices.

“A lot of these operators historically have been skittish, like, ‘Why do I need to have this?’ Or ‘Why do I need to operate in an aboveboard, transparent manner?’ ” said Pyform.

Operators may be unfamiliar with things like loss control, which can be a particular problem for workers’ comp.

“You have a lot of sophisticated operators who do a great job at it, but you still have new-in-business, maybe they’re even coming over from the black market,” said Ward. “They’re just learning the ropes on how to create a safe working environment for their employees, which obviously affects worker’s comp and potential claims.”

One issue that is seeing improvement is confusion over class codes.

“Over the last couple years, class codes have gotten significantly better,” said Frost. “But in 2013/2014, when I started in the cannabis space, they were rating everything as florists or retail flower shops, and then the cultivators were garden centers. It’s definitely evolved, and it’s been fun to see, but they’re still trying to figure that out.”

Large Versus Small

Some challenges are different for large operations and small.

Smaller operations may have workers doing more differentiated tasks, which can mean they are not as well trained as workers performing single tasks in larger, more differentiated workplaces. It can also lead to higher premiums.

“Growing is seen as a higher exposure than being in a retail store,” said Ward. “So, if they were doing both, they would be placed under the grow code because just to get that right, even if it’s 1% of the time, we need them to be under that code so that we get the correct rate for it.”

Larger companies are also more likely to have the resources and scale to utilize more mechanization.

“Larger companies are looking to improve their efficiencies and their overall profits, and they are taking into consideration ergonomic exposures,” said Win Williams, SVP and risk services lead for HUB’s cannabis specialty practice.

“So, they’re investing in things like mechanical devices, equipment, and automation, which reduces ergonomic exposures and increases efficiencies.”

But, he added, “the smaller companies that may not have the money to invest in equipment can still find opportunities to reduce their ergonomic risks — this starts by assessing each job from an ergo standpoint and finding creative ways to reduce the ergo risks like re-arranging process lines or implementing job rotation.”

Virdi sees a balance between the two.

“Large operations will naturally have a bigger exposure with higher employee counts and a lot more stuff going on versus a small operation,” Virdi said.

On the other hand, large operators are more likely to invest more in safety and have formal safety programs.

“It’s not often a priority for small operators, which we feel it should be, but it’s just the dynamic and the growth of the emerging industry that we’re really facing right now,” Virdi said.

Perhaps surprisingly, larger operations can see higher losses.

“When we’re dealing with MSOs, there tends to be a little bit higher loss, frequency and severity,” said Ward. “… I think it’s more of a scale thing, to where these guys are growing so quickly, it’s hard to get the right controls in place to properly protect your employee.”

Still, larger, more established operations may have an easier time finding coverage.

“If you’ve been illegal for 30 years and then you finally transition over to the recreational market, it’s going to be a little more stringent in underwriting to get that insurance obtained versus a multi-state or publicly traded company that has an experienced board of directors,” said Frost. “It’s going to be a lot easier.”

The good news is, both large and small continue to improve worker safety and develop industry best practices.

“As the industry grows and matures, cannabis companies are putting a lot more emphasis on employee safety and they are developing specific safety programs, policies, procedures, standard operating procedures, and employee training,” said Williams. “So there is a shift towards improving safety overall at cannabis companies.” &