Cannabis Shares a Business Model With Lemonade Stands: Federal Restrictions Are to Blame

The difference in state and federal legality of cannabis use is just one item on the list of things that are making insuring it difficult.
By: | January 28, 2020

The road to cannabis insurance is not getting any smoother with the drug’s emerging legality.


Despite being legal for recreational use in 11 states and legal for medicinal use in 11 others, using cannabis for any purpose is still illegal under federal law.

Legal restrictions, high costs and hefty state regulations are a few things discouraging insurers from entering the market.

Because of the lack of insurance options, many existing legal cannabis distributors operate cash-only businesses without insurance — a business model quite similar to that of a lemonade stand.

Insuring the Gray Areas

When dealing with cannabis, insurers have never waded in a market that has more gray areas; alcohol is illegal to anyone under 21, non-prescription drugs are illegal, period. The right to use marijuana, however, differs across state lines.

According to the National Conference of State Legislatures, 26 states have decriminalized small amounts of marijuana. Decriminalization typically means it’s punishable by the lowest level of a misdemeanor, and offenses typically result in a civil infraction or local fine.

Because of the blurred lines between what is allowed on a state level, coverage is not available to many cannabis operators. When it is, it comes at a cost.

“Being a legal, licensed cannabis operator just made the underwriting process super, super extensive,” said Tim Conder, chief operating officer, TILT Holdings of insuring his business. TILT operates as an umbrella of cannabis companies that offer products to businesses operating within the cannabis industry.

“Sometimes policies just aren’t worth the paper they’re written on, so we see a lot of interesting hurdles around federal legality.”

But with the increasing demand for the substance, more insurers are modernizing their policies to exclude ‘federal legality.’

Calling for Consistency 

Tim Conder, chief operating officer, TILT Holdings

In Maine, where marijuana has been legal since 2016, Republican Representative John Andrews recently called on Congress to make banks and insurance accessible to cannabis businesses.

Considering the plethora of legal loopholes, high costs and lack of research, few insurers have ventured into the emerging market, and demand for cannabis is now making the legal landscape even more complicated.

Already approximately a $13 billion dollar industry in the U.S., the number of cannabis sales is expected to double in the next three years.

“It’s becoming more mainstream. More states are legalizing so more companies are starting to enter the market,” said Conder.

“The optionality is a huge benefit to cannabis operators. We’re not seeing prices go down, but at least there are more to choose from. A few years ago, there were one or two policies that you could actually acquire.”

Because of the limited competition, insurers that have been covering cannabis since the beginning have positioned themselves for industry dominance.

An Industry Green with Opportunity

But just like with any emerging market, there are wide-eyed brokers and insurers looking to capitalize on the opportunity.

Business owners operating within the industry are exposed to unprecedented underwriting when it comes to new products. This considered, Conder emphasizes the importance in being diligent when it comes to knowing your policies, having a relationship with your underwriter and asking simple questions.


“As business owners, we sometimes assume that if you have insurance, it will pay out. The reality is, not all policies pay out and exclusions exist for a reason, so just asking a very simple question like, ‘Have you ever paid out on a claim?’ is a great way to knowing the likelihood of that happening in your own experience.”

While the last decade showed consistent progress within the cannabis industry, the next decade is positioned to address the most important question of the moment: What is going to happen to the drug’s Schedule 1 status?

As legality expands, the contrast between state and federal regulations only becomes starker, ultimately increasing risk exposure for business owners.

“I think 2020 will be a pretty litigious year for the cannabis industry, so it’ll be interesting to see what else evolves on the legal landscape,” Conder said. &

Emily Spennato is a former staff writer with Risk & Insurance.

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