Cannabis: Striking a Balance Between Federal and State Laws

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by Patrick Wraight

Currently, 30 states and the District of Columbia have legalized the use of cannabis in some form. Some states restrict use to medically necessary uses, while other states have legalized recreational use. Still other states have formally (or informally) de-criminalized its use. The beauty of the American system of government is that the

federal government can pass laws, but so can the several states. This can also create problems, because marijuana is still listed as a Schedule 1 drug according to the Federal Controlled Substances Act (21 U.S.C. Sections 801 through 812). This puts federal law in conflict with the laws of over half of the states.

Of course, before the ink was dry in every state that has legalized the use of cannabis, the seeds of new businesses were already planted. It didn’t take long for a new industry to sprout up in California, Colorado, and the other states that have taken to legalize cannabis.

What about their insurance? Certainly, this business has exposures that many insurance policies, including the small business-focused business owners’ policy (BOP), simply don’t anticipate.

On June 1, 2018, the American Association of Insurance Services (AAIS), an insurance advisory organization, received approval for its CannaBOP policy in California. This new policy was designed for the legal cannabis businesses that have started growing in California. We recently received a copy of this policy and analyzed how AAIS chose to handle this exposure.

What is a BOP?

A BOP is a kind of package policy that is designed for certain small businesses with relatively simple exposures, not very many employees, smaller buildings, etc. It’s a package policy because the basic property and liability coverages that a small business will need are offered on one policy. BOPs can be customized to meet the needs of specific businesses, but they are usually limited in how they can be customized.

This particular BOP is customized in many ways to account for the exposure created by the cannabis business in California. The policy language has been written so that it fits specifically in this niche. How does this policy walks the line of helping the cannabis industry in California, while having to deal with the federal laws that still make it an illegal industry?

Property insurance policies and liability insurance policies have definitions. One of those definitions tells the consumer where coverage applies. That is the term “coverage territory.” For this new BOP, the authors had to be very clear that certain exposures were limited by location. On the property part of the policy, it uses the term “basic territory.” Here’s the definition:

“Basic territory” means the United States of America, its territories and possessions, Canada and Puerto Rico. With respect to losses to “cannabis” or “cannabis accessories,” and losses arising out of or in any way related to “cannabis activities,” the “basic territory:”

a. Is limited to the state of California; and

b. Does not include land or property owned by the United States government.

That’s the definition for the property coverage. Here’s part of the definition for the liability section:

“Coverage territory”:

a.With respect to “bodily injury,” “property damage,” or “personal and advertising injury” arisingout of “cannabis,” “cannabis accessories,” or “cannabis activities,” the “coverage territory” is limited to the “basic territory.”

The policy carefully carves out coverage for this specific part of the insured’s exposures by limiting the exposures related to cannabis to California, except for any land or property owned by the United States government.

Why is that?

Remember that there is a conflict between the state law and federal law.

This means that there is coverage for the insured’s cannabis exposures anywhere in the state of California that they might do business, except for any federal land. That might not be a big deal on the surface, but consider that there are large areas of California that are under federal control. That’s why some other policy provisions provide some more clarity (and restriction).

A common property policy additional coverage is often called property removed. On this policy, it is referred to as removal. This additional coverage shows:

Removal

a. “We” pay for direct physical loss to covered property while it is moved or being moved from the “described premises” to prevent a loss caused by a peril insured against. This additional coverage does not increase the “limit” for the covered property.

b. Time Limitation – This additional coverage applies for up to 30 days after the property is first moved, but does not extend past the date on which this policy expired.

c. Restriction – This additional coverage does not apply to “cannabis” or “cannabis accessories” that are moved or being moved:

1. Outside the state of California; or

2. To, over, or through any land or property owned by the United States government.

So, if a covered loss may happen (i.e. the location may be in the path of a wildfire), insureds have the duty and ability to protect their property, and the policy honors that by providing true all-risk coverage for property that is removed to protect it. And, we have to deal with the tension between the state and the federal government.

Federal Problems

Of course, entering federal lands puts the insured in federal jurisdiction and potentially outside of any legal protections that may exist for the industry in California. Crossing state lines also puts the insured under federal jurisdiction, because transporting a product across state lines could be interpreted as interstate commerce. It is also against federal law to transport illegal items across state lines. It could be considered trafficking an illegal substance.

What the policy is doing here is protecting the insureds by reminding them that what they are doing is legal where they are, but not legal in all areas. It is a tension that the business owner will have to navigate the entire time that they are in business.

The policy carefully carves out coverage for this specific part of the insured’s exposures by limiting the exposures related to cannabis to California, except for any land or property owned by the United States government.

What does all of this mean?

It means that member companies and agents that use this form for their insureds will need to make sure that they explain how coverage will apply. Of course, this is only part of the analysis. There is much more to this policy than just where coverage applies.


About Patrick Wraight

Patrick Wraight, CIC, CRM, AU, is director of Insurance Journal’s Academy of Insurance. He can be reached at pwraight@ijacademy.com.


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Comments

  • October 9, 2018 at 5:22 pm
    Jo Smith says:

    How does one contact AAIS? a google search came up with another company. I have a client that is looking for this. Many thanx

    • November 1, 2018 at 9:30 pm
      Brett Arthur says:

      The industry is growing so fast & just like every other aspect the Insurance industry is going to go Green as well. These BOP coverages and cannabis specific agencies are popping up in prep for all of this and can offer GL & some form of Commercial policies. The best model (almost seems built for it) is the PEO/Employee leasing side of it. They can get the employees paper checks to prove income, while also helping with lower premiums & provide HR & functions now help with compliance. Let me know if I can help!

  • October 9, 2018 at 7:21 pm
    Mark Thomas says:

    I’ll bet the underwriters and lawyers who are writing these policies feel naughty in an exciting way. :)

  • October 12, 2018 at 5:43 pm
    Law Student says:

    Interesting article. Thanks for the insight. Are these policies enforceable? With cannabis still being federally illegal even in a state like California that has legalized, it would seem that such a policy would be ensuring a criminal industry, which would not be enforceable. Thanks.

  • November 1, 2018 at 8:34 pm
    Brett Bailey says:

    It’s going to change the insurance industry just as much as all the others. Pretty cool offering I heard about from a buddy that is a dispensary owner, is that he connected with a PEO brokerage that happened to reach out to him on Linked in. He said they just had found a market for Cannabusiness for work comp & payroll, so he could give his employees paper checks! He said they did compliance stuff too, might be a great model for the industry. I checked out their site, it isn’t listed there but something to note I guess. He said it Was Legacy, and pointed out this site http://www.legacyemployerconcepts.com

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