Navigating highs and hazards in the cannabis insurance market

This article was produced in partnership with Davies.

Chad Beadles (pictured), associate vice president – Risk Services, Davies, spoke with Nicole Panteloucos from Insurance Business about the unique challenges and opportunities presented by cannabis legalization to the insurance industry, emphasizing substantial potential and highlighting key risks in cannabis operations.

Regulatory shifts and operational risks

Insurance Business: What are the advantageous of nationwide cannabis regulation?

Beadles: I really think that federal rescheduling of cannabis will alleviate a lot of the regulatory burden that insurance companies currently face. It would allow insurers to offer coverage on a state-by-state or national level without navigating complex and varied state regulations, reporting requirements, and other administrative challenges. Simplifying these regulatory hurdles could make operations smoother and reduce the risk of compliance issues slipping through the cracks, which I believe will be a game-changer for the industry.

IB: Can you explain some of the primary risks associated with ensuring cannabis operations?

Beadles: We primarily encounter three classes of risk: retail stores selling both medical and recreational cannabis, often combined; growers; and manufacturers involved in oil extraction for edibles. Growers and manufacturers pose significant challenges due to fire risks from processes using flammable substances like butane. With grow operations, specific types of light bulbs and fixtures are crucial; mixing the wrong ones can lead to disastrous consequences. Imagine a room full of valuable plants burning—it’s like a farmer losing a cornfield, but indoors.

Education and understanding

IB: How is Davies involved in the cannabis space?

Beadles: We specialize in providing support for risk management, particularly to the insurance industry. Many of our clients are pioneers in writing policies for cannabis in legalized states, and we’ve partnered closely with them. One of our key partnerships is with Burns and Wilcox, with whom we’ll host a panel later this year featuring their US national lead for their cannabis program. Our role involves extensive research and development of risk management forms, collaborating closely with brokers to identify critical areas. Given the emerging nature of this market, our approach focuses on understanding cannabis operations, assessing risks, and implementing effective controls tailored to this sector.

Retail vs. grow operations

IB: What are the typical concerns that insurers have regarding cannabis-related risks?

Beadles: What we often see is a reluctance among insurers to cover properties that include cannabis retail stores, solely due to the association with cannabis. However, there’s a significant distinction between a retail store and operations involving cannabis grow or manufacturing. Retail operations typically do not involve high-hazard activities, similar to a convenience store setting. Many overlook this distinction due to the stigma associated with cannabis. We focus on dispelling fears and emphasizing robust risk management. This approach allows us to ensure adequate coverage by implementing necessary controls and adjustments, particularly for more hazardous operations like on-site cultivation.

The future of the industry

IB: Could you discuss any innovative solutions or products developed to mitigate risks in cannabis operations?

Beadles: One innovative approach involves a chemistry-based strategy by a prominent edibles company in Colorado. They’re exploring compounds like Delta-8, a synthesized form of THC, aiming to enhance control and consistency in production. However, this chemical approach also introduces new challenges due to the high-risk nature of the processes involved. Despite the advancements in chemistry, considerations for product liability remain crucial, highlighting ongoing complexities in this evolving sector.

IB: How do you envision the evolution of the cannabis insurance sector over the next decade?

Beadles: I’m really eager to see how this plays out. It’s hard to predict exactly, as much depends on upcoming electoral decisions. But what I anticipate is a shift toward a more open market scenario for cannabis insurance. Rather than just a few specialized players, I think we’ll see broader participation, particularly in retail, which could drive more competitive premium rates—not necessarily lower, but definitely more competitive. This broader involvement will also mean more parties in the insurance sector analyzing claims and risks, which will really grow our data and give risk managers and underwriters a lot more to work with.