Talk about a growth market. Since Colorado and Washington became the first to pass state laws designed to legalize certain sale and consumption of recreational cannabis in their respective states in 2012, 15 other states have followed suit — including several states in the early months of 2021. While cannabis remains a Schedule 1 controlled substance under federal law, several states have enacted measures designed to decriminalize the possession of small amounts of marijuana at the state level.

Public attitudes towards marijuana legalization have undergone a similar evolution, with majorities now favoring the legalization and sale of recreational cannabis. No surprise then that some researchers expect the market for recreational marijuana to grow sharply over the next several years.

For homeowners insurers, the evolving legal landscape means they may be confronted with more coverage questions and possible property and liability claims involving cannabis, especially for states where the laws have changed.

Here are just a few of the potential coverage-related issues that homeowners insurers should be considering.

Cannabis products stored at home. Like any other piece of personal property, cannabis can be stolen, damaged, or destroyed by a covered cause of loss. If your insured lives in a state that has enacted a law designed to permit marijuana sales, and that marijuana is destroyed in, say, a fire, they may seek to include the value of the lost cannabis in a homeowners insurance claim.

Cannabis grown at home. Some states have passed laws that permit growing a limited number of marijuana plants at home for personal consumption. Policyholders may wonder if the cannabis they’re growing at home would be covered if it were destroyed by a covered cause of loss, since a homeowners policy may include limited insurance coverage for plants.

Liability and medical payments. As the trends in state laws change, house parties may come to feature not just wine and cheese (or beer and pizza) but marijuana joints and cannabis edibles as well. In such an environment, your insureds could face liability claims similar to those that result from host liquor liability.

Cannabis exposures crossing state borders. Even insureds who reside in a state where marijuana laws haven’t changed could still face cannabis insurance exposures. For instance, they could travel into a state, such as while taking a vacation, with laws that permit medical or recreational marijuana and they could face some of the same property or liability exposures described above. Or perhaps the policy extends coverage to children attending college in a state where the laws are more permissive. As state laws continue their evolution, deciding whether to explicitly exclude cannabis or offer affirmative product and liability coverage is becoming an issue that’s hard for homeowners insurers to avoid.

Cannabis Insurance Pricing

If you’re interested in affirmatively covering cannabis, a second, equally thorny, question arises: How do you price these exposures?

Because state-legal cannabis is still a relatively new risk exposure, insurers may not yet have sufficient volumes of loss data to help guide pricing. In that case, it may be helpful to consider use of a proxy — a product you can reasonably expect to demonstrate similar loss experience as cannabis and for which ample statistical data is available.

In the case of cannabis property exposures, one promising proxy is jewelry. Here’s the logic: Both jewelry and cannabis are valuable (one ounce of legal marijuana can command over $500), both can be easily stolen, and both can be easily damaged. The general, if still untested, the assumption made is that if a thief enters a home and starts pilfering valuables, they may take both your insured’s weed and wedding rings. By extension, if your insured lives in a state that has liberalized their cannabis laws, they may file claims that includes both their wedding rings and their weed.

For liability, a useful proxy could be host liquor liability. The reasoning here is fairly straightforward: Both liquor and cannabis are intoxicants that could potentially be enjoyed at an insured’s home and later lead to accidents, property damage, or other potential liability claims. Of course, there are some additional considerations if you select this proxy. For one, cannabis usage rates differ from alcohol, so frequency assumptions should account for that. You may also need to consider the frequency with which insureds could engage in “marijuana tourism” — leaving their home state to indulge in some state-legal cannabis before returning home with a story to tell (or forget).

The Times Are A’Changing

As with any new exposure, time — and experience data — should bring further clarity into the nature of cannabis risks. For now, though homeowners insurers need to consider the property and liability risks associated with its evolving legal status. How will they cover the risks of their insureds growing, using, and serving marijuana to guests? How will they price the risks associated with each of these activities? There’s no time better than the present to prepare for the potential, and pitfalls, of pot.

 

William Schlager is director of ISO personal property and farm product development at Verisk. Email: William.Schlager@Verisk.com.

Angela Cuonzo is actuarial director of personal property and farm actuarial products at Verisk. Email: Angela.Cuonzo@Verisk.com.