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Posted by Linda McHenry ● December 3, 2020

Insuring Cannabis Risks: Banking and Policy Coverage Issues [Part 2]


In Part One of our Insuring Cannabis blog series, we discussed the differences between the federal and state regulation of cannabis. In this second installment, we will dive into the resulting banking and business insurance challenges faced by cannabis businesses. The National Association of Insurance Commissioners formed an official working group to begin addressing the unique business insurance needs of the growing cannabis industry. In the summary of the working group's published white paper, Understanding the Market for Cannabis Insurance, the following conclusion was reached:

"...Major cannabis insurance gaps exist in many states ... even in those states that have encouraged successfully the entrance of insurers into the cannabis insurance market. 

...The purpose of this [study] is to provide information to state insurance regulators, insurers and the broader public about the architecture of the cannabis business supply chain, types of insurance needed by the cannabis industry, the availability of cannabis business insurance in state insurance markets and the extent of insurance gaps, and best practices that state insurance regulators can adopt to encourage insurers to write insurance for the cannabis industry."

Before diving into the coverage gaps, the first issue to be considered is banking. Many insurance and business-related risks stem directly from this unresolved issue. 

Are banking rules different for cannabis businesses?

The answer is yes, and this is why. As long as cannabis/marijuana remains a Schedule 1 Controlled Substance, and until there is federal legislation in place to protect financial institutions from prosecution for violating AML statutes and the Bank Secrecy Act, most cannabis businesses will have little choice but to continue operating on a cash basis.

Most federally regulated banks and financial institutions have refused to open accounts for cannabis-related businesses due to the onerous BSA, AML, and FinCEN reporting and monitoring requirements currently in place. Suspicious Activity Reports must be filed for ALL cash transactions over certain limits, and for any transaction involving money the bank suspects was earned illegally. Legality at the state level for a business does not override federal drug and money-laundering regulations. Cannabis businesses are caught in the cross-fire, with every operational function—paying vendors, employees and rent, paying taxes, purchasing inventory, coving utilities, and yes, buying insurance—taking place as a cash transaction. 

The following example illustrates perfectly why federal banking regulations need to change for the cannabis industry to be able to thrive:

A small, legal cannabis business received a $20,000 payment after submitting an insurance claim for theft and property damage (a risk much higher than for other businesses, even in the same part of town, because of the amount of cash on hand at any given time). Unfortunately, the business’ owners could not find a bank to cash the insurance check.

After much searching, the owners finally found a credit union that agreed to cash the check … but only if the business opened an account with the credit union and only if it agreed to pay minimum monthly fees ranging between $1,000 and $4,500--depending upon the amounts of the transactions.

So, yes, banking rules are different for cannabis businesses. It is estimated that at least 70% of cannabis businesses have no relationship with a financial institution and pay cash for all transactions, including salaries for employees.

What is happening to resolve the banking issues faced by cannabis businesses?

Several pieces of federal legislation are currently pending.

The proposed Safe Banking Act would ease some restrictions under the Bank Secrecy Act and other anti-money laundering statutes. Specifically, this law would:

    • Declare banking transactions of cannabis businesses NOT to be proceeds of unlawful activity (which they currently are, under federal law)
    • Offer immunity to banks and financial institutions for working with cannabis businesses

The MORE Act is also pending, and if passed, would decriminalize marijuana by removing it from Schedule I of the Controlled Substances Act. It would also require expungement of previous and current nonviolent cannabis convictions and impose a 5% federal tax on marijuana.

The legalization of marijuana has very strong proponents and opponents, and the differing factions do not seem close to reaching a compromise—at least not at the federal level. As legislation continues to be drafted, many believe it will not be long before acceptable language can be adopted and the issue of cash-based business transactions can be overcome.

Do cannabis businesses have access to the same commercial insurances as other businesses?

Because cannabis businesses pose a number of unique risks to insurance companies, obtaining adequate insurance can be difficult, if not impossible, at nearly every level of the industry.

  • Underwriting standards for greenhouses, lights, ventilation, and security are very stringent. 
  • Valuation of inventory can be challenging because seeds and cuttings have a much higher value than adult plants. 
  • The plants are annual, not perennial, and most of the seeds are currently obtained from Canada and Europe.
  • The large amounts of cash cannabis businesses have on hand is problematic. 
  • In-store theft and shoplifting continue to plague cannabis businesses and drive the costs of crime coverage upward. 
  • Product tampering is common, and can occur anywhere from cultivation through the growing, wholesale, retail, and distribution processes. It can also occur after a product has been stolen and repackaged.

Other issues that have been reported for cannabis businesses include:

  • Leases are hard to come by, and utilities and rents are higher than they are in other industries.
  • Business owners are often unable to obtain financing, credit, and payment processing vendors.
  • Limited options exist for advertising and marketing.

How are cannabis businesses taxed?

The tax consequences of owning a cannabis business are huge. Federal reporting of income is required for all businesses—even those considered illegal by the federal government and the IRS. However, illegal businesses cannot take advantage of the same tax deductions other businesses can and their tax rates can be as high as 90%.

Under federal law, cannabis businesses essentially pay taxes on their gross profits rather than net income because most deductions are not permitted. Consider also that the business relief loans and other measures offered during the pandemic this year, were NOT made available to cannabis businesses, including tax relief.

Is the NAIC Cannabis Insurance Working Group still meeting?

Yes. The 2020 working group adopted the following charges, which will follow the group into 2021.

“The Cannabis Insurance (C) Working Group will:

  1. Assess and periodically report on the status of federal legislation that would protect financial institutions from liability associated with providing services to cannabis businesses operating legally under state law.
  2. Encourage admitted insurers to ensure coverage adequacy in states where cannabis, including hemp, is legal.
  3. Provide insurance resources to stakeholders and keep up with new products and innovative ideas that may shape insurance in this space.
  4. Collect aggregated insurance availability and coverage gap information, as well as other cannabis and hemp insurance-related data to then publicly share the cannabis and hemp insurance-related data in a released report by the end of 2021.”

Watch for Part 3 in our Insuring Cannabis series: Cannabis Insurance FAQs. For more information, register for our new CE webinar, "Insuring Cannabis Risks."

Topics: Insurance, Cannabis Insurance

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