A practical approach to the legalisation of recreational cannabis for insurers

Canada has introduced legislation providing a framework for regulated access to legal cannabis for recreational use. The proposed Cannabis Act¹ provides for oversight of the legal cannabis industry, with the federal government establishing licensing and authorisation requirements for production, packaging and labelling, and provincial/territorial governments overseeing distribution and retail sales. It is widely expected the Cannabis Act will come into effect by July 2018. In anticipation of the legalisation of cannabis for recreational use, the provincial/territorial governments are also introducing new legislation to regulate, among other issues, its distribution and retail sale.

Elif Oral from our Quebec City presents an overview of just some of the issues facing the insurance industry as recreational cannabis becomes legal.

General considerations

• The imminent legalisation of recreational cannabis presents a specific challenge for the insurance market. Insurers, who now face the difficult task of re-assessing a variety of risks in order to adapt or create new products, will have to do so without the benefit of reliable Canadian data or statistics on the subject and while federal and provincial regulations – still not drafted – remain a very large blind spot.
• In other words, for those insurers who decide to jump on the bandwagon to participate in what has been coined by some as the “green rush,” it will mean insuring an evolving risk. Significant “wordsmithing” of existing insurance policies is therefore to be expected to ensure insurance products appropriately cover the risks and claims that will come with the changes in legislation.
• There are a number of reasons why insurance companies might choose to take a “wait-and-see” approach to the emerging market of insurance products targeting legal recreational cannabis. For example, since policy rates are in great part based on past claims, and with limited data available for the risks of a legal cannabis growth operation – and none for Canada – some insurers may choose to stand back for a few years before entering this new market. Others may decide to stay out completely out of concerns about reputational risk, much the same as they have historically done with the tobacco industry. Others still may stay out of the market for purely commercial reasons because of the high-risk nature of grow operations, mainly with respect to potential for fire and water damage, which can result in expensive business-interruption losses.
• An additional consideration is that growing recreational cannabis for commercial purposes (by licensed producers) but especially for private purposes, may constitute a “material misrepresentation” or “material change in risk” from the standpoint of insurers. Currently, insurers of course do not typically ask the insured whether he or she has a cannabis growth operation on the premises but may want to do so, both at application and renewal, after the Cannabis Act comes into effect.
• In other words, insurers will have to bear some of the burden of ensuring policyholders are complying with evolving laws – at least in the short term. Insurance advisors and brokers will therefore have to perform more thorough risk assessments.

Insurance related to private cannabis growers

• While there were over 40,000 people licensed to grow medical cannabis for their personal use in 2014 in Canada, this number is expected to grow as recreational cannabis is cultivated in private homes, where allowed by law, when the new legislative framework comes into force.
• Grow operations can increase susceptibility to fire and water damage if not set up appropriately: electrical modifications and overloaded circuits can increase the fire hazard while poor ventilation can cause mould and affect air quality. Additional inherent risks for the insurance industry are vandalism and burglary.
• Interestingly, the largest exposure cannabis growers currently face is having inadequate coverage offered by insurers who, while allegedly offering coverage, have many ways to deny cover, either through inadequate wording or various exclusions. In fact, the legalisation of the commercial and personal cultivation of cannabis, where allowed down the road, will essentially re-introduce a peril that is currently excluded under personal policies (and some commercial policies), most often by the “Criminal Activity/Act” exclusion – which currently applies to unlicensed grow operations – or by the “Grow Operation” exclusion, or both.
• More specifically, if insurers continue to include such exclusions in their home owner’s insurance, their wording would most likely benefit from being re-assessed, namely in consideration of (1) the interaction with the “innocent insured” exception, i.e., the exception that provides coverage for the insured making a claim who is not aware there are cannabis grow operations in the home (2) whether a causal connection between the loss/damage and grow operation will be required and if so, how proximate such connection must be.²
• The positive effect of legalisation is that insurers will be able to openly provide coverage and charge appropriate premiums for those who choose to grow operations in their home. This effect could also make these operations safer because insurance companies will likely insist on certain safety protocols and measures to reduce risks (and may allow denials of coverage if not adhered to).

Insurance related to licensed producers

• In general terms, licensed producers (LPs) that are commercial growers will have similar insurance needs to businesses that grow other crops in commercial greenhouses. As with the sale and distribution of any product, specifically a regulated substance, LPs will have an increased liability exposure. For example, improper ventilation can cause illness as well as an olfactory nuisance to the surrounding area, improper labelling (“failure to warn”) or manufacturing of the product can lead to bodily-injury losses.
• From a mass production standpoint, commercial producers have specialised equipment and strict requirements regarding temperature and other growing conditions. There will be a need for specialised property and equipment breakdown coverage to respond to this exposure, and this need is expected to grow significantly as more producers are licensed.
• While not currently allowed by the Cannabis Act, the federal government has indicated its intention to eventually legalise and regulate cannabis edibles and derivatives. This development will create new opportunities and subsequent risks. LPs that decide to produce cannabis-related products, for example consumables that contain cannabis, will have to consider product liability insurance from this standpoint as well.
• Since LPs must meet many requirements to get licensed, the issues underwriters are generally concerned with (e.g., building construction, security measures, neighbouring risks, access to fire departments, proximity to fire hydrants, etc.) will most likely have been addressed through the licensing process itself. Contingency plans and other risk mitigation strategies will be additional considerations taken into consideration by underwriters.
• In other words, while licensing will be a prerequisite for insurability, insurers will also consider what risk management protocols are in place.

Insurance related to dispensaries and cannabis clubs

• Cannabis clubs (D&Cs) are likely to be exposed to “commercial host” liability, similar to what bars and restaurants face with respect to liquor, if jurisdictions choose to allow cannabis consumption lounges.
• At this point, there are limited insurance options and limited coverage available to D&Cs (and to landlords with D&C tenants, who are often listed as additional insureds on the policies) and such coverage is primarily through specialties markets.
• With the federal government’s move towards recreational legalization, insurers are opening up to the idea of providing coverage for these businesses and over time, as insurers get more comfortable with such businesses, the cost of coverage may come down.
• With respect to coverage, D&Cs will typically be looking for premise liability to satisfy their landlords and basic equipment coverage. Some D&Cs may also accept paying the additional premium for full commercial general liability coverage or stock coverage.
• If the D&C allows customers to sample different products, adequate liability coverage is especially important in case customers fall or hurt themselves as a result of becoming intoxicated.

Automobile insurance

• Currently, driving while drug impaired is treated the same as driving while drunk, under the law and for insurance purposes since it is generally accepted that cannabis causes a slowed reaction time, blurred vision, and drowsiness, all risk factors while operating a vehicle.
• Of note however, individuals authorised to use medical cannabis do not have a duty to inform their insurer that they are using cannabis. In other words, to auto insurers, prescribed use of cannabis is the same as any other prescribed medication.
• Determining whether someone is drug impaired may not be as straightforward as determining whether he/she is drunk. There is already considerable discussion in the legal community about whether there is a “one size fits all” test for determining impairment as different chemicals and strains of cannabis, not to mention their method of ingestion, can yield a variance in results.
• Given the plans to legalise cannabis, the federal government is looking at ways of improving the ability to detect drug-impaired driving, including by measuring the amount of tetrahydrocannabinol (THC), the principal psychoactive ingredient in cannabis. Canada has not outlined a minimum impairment limit on the amount of THC one can consume, though it is expected to follow the baseline rolled out by states that have legalised marijuana for recreational use. Montana, Colorado, and Washington all have a limit of 5 nanograms per microliter of blood for personal vehicles.
• The US Department of Transport however, has banned the use of cannabis by commercial drivers, which may be a safe standard to go by for Canadian truck drivers, since under first-party property insurance, insurers will not pay for loss or damages if the person is unable to maintain proper control of his or her vehicle while under the influence of an intoxicating substance.
• There is also the risk the corporation will be subject to independent claims of negligence if one of its commercial drivers causes damage while driving under the influence of cannabis. In such cases, employers are usually blamed for failing to implement alcohol and drug policies and failing to screen and supervise employees. Therefore, insurers should determine whether insureds that operate commercial fleets have a specific marijuana-use-related drug policy effectively rolled out before the new legislative framework comes into force.

Life and health insurance

• With life insurance, there are signs that the underwriting process has already been affected: cannabis smokers – who have traditionally been classified as “smokers” – are now being treated as “non-smokers” by a number of major life insurance companies, which means significantly lower premiums.
• For health insurance, the discussion is centring on whether or not employee benefits should include medical cannabis. Indeed, with the joint announcement by some major companies that cannabis benefits will be offered to employees, and with a recent decision by a human rights board that it should be made available in health benefits, the conversation is evolving quickly.