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The legal cannabis industry has experienced rapid growth over the last few years and has had a significant impact on the United States economy. In 2018, the cannabis industry reached over $10.4 billion in sales and is projected to reach $22 billion by 2022. The number of jobs directly related to the industry reached 211,000 in 2018, and with over 64,000 new jobs added, it is one of the fastest growing job markets in the country.1 Cannabis is currently legal for medicinal use in 33 states (and D.C.) and for recreational use in 11 states (and D.C.)2 With the cannabis market booming and states continuing to legalize its use, insurance needs for these businesses are becoming a significant topic of discussion.
Despite being legal in many states, cannabis is considered a Schedule 1 substance by the United States Drug Enforcement Administration. Insurance carriers have been slow to enter the cannabis sector due to the drug’s illegal status federally and the very limited data on health impacts, loss trends and milestone claims needed by underwriters to accurately understand and price the risks. A.M. Best reported that insurers who have entered the cannabis space remain cautious, only offering basic policies with limits that may be inadequate for larger marijuana business owners.
Cannabis businesses are also unable to find coverage through the London market, as Lloyd’s prohibits writing cannabis risks in the United States due to federal banking regulations. However, since Canada passed national legislation in October 2018 making all cannabis and hemp products legal, many Lloyd’s syndicates and underwriters are actively writing various coverage lines on Canadian cannabis accounts.
This article will examine five of the most significant issues impacting insurance coverage for the cannabis industry in today’s market.
Since cannabis is illegal at the federal level under the Controlled Substances Act, financial institutions are subject to criminal prosecution for their involvement with cannabis-related businesses. For some states that have legalized cannabis, there are community banks and credit unions that are willing to provide banking services. However, to protect themselves from legal repercussions, many financial institutions remain hesitant or unwilling to work with cannabis-related accounts. This has forced numerous cannabis-related businesses to operate on a cash-only basis, making it difficult for those companies to engage in standard business practices such as paying employees and taxes.
The Bank Secrecy Act, Money Laundering Statute and Unlicensed Money Transmitter Statute are the three primary federal criminal laws that can be triggered when institutions engage in transactions involving cannabis or proceeds from the sales. Violations to these laws can result in serious fines (up to $500,000) and jail time.
A potential resolution may be on the horizon. In March 2019, the House Financial Services Committee voted in favor of advancing H.R. 1595, the Secure and Fair Enforcement (SAFE) Banking Act. The proposed legislation would provide the following benefits:
Update: On September 25, 2019, the House of Representatives passed the SAFE Banking Act by a vote of 321 to 103.4 Before becoming law, the legislation still needs to be voted on by the Senate and signed by the President.
Since many cannabis-related businesses, such as dispensaries, operate using paper currency, crime is a significant part of their risk exposure. These businesses also house a large amount of product that can be stolen and sold on the black market for a substantial amount of money. This high potential for crime puts employees and patrons at risk for injury if a robbery should occur.
Despite the substantial risk of crime, many carriers will exclude Assault & Battery or sublimit the coverage. As a result, a business’ location and its security features are important factors to be aware of when looking to place coverage.
While the crime score of a location can impact its ability to secure coverage, even retailers with insureds in safer areas should still review the policy to ensure Assault & Battery is not excluded.
Insurers will often review the due diligence measures and sophistication of security programs employed by a business to prevent crime. For retail dispensary shops, this can include ID checks, personal shoppers that monitor a patron’s activity, a limit to the number of customers allowed in each room at a time, and surveillance cameras. For cultivation facilities and processors, third-parties are typically brought in to handle security. Their services can include armed security with automatic rifles, trained dogs, and armed car service for transportation of product. Businesses with robust risk management programs can see a reduction in rates and more coverage options.
With passage of the Farm Bill in 2018, the United States Congress has legalized the cultivation of hemp and, if produced in a manner consistent with the law, removed restrictions on the sale, transport, and possession of hemp products. Under this bill, hemp is defined as the cannabis plant with one important difference: hemp cannot contain more than 0.3 percent of THC, the chemical responsible for most of cannabis’ mind-altering effects. Cannabinoids (or CBD) are a set of chemical compounds found in the cannabis plant. Under the Farm Bill, any CBD product derived from hemp is considered legal if produced in a manner consistent with the legislation.5
Since hemp and CBD are now legal, their coverage must be separated out from other cannabis risks. With its legalization still relatively new, hemp and CBD insurance placements remain solely in the E&S market. There are insurance products available on the casualty side, but it may take some time before these risks are available in the standard market or in a farm liability package.
Cannabis risks and exposures have expanded beyond traditional smoking. Vape pens and e-cigarettes are becoming users’ preferred method of consumption due to their convenience and reduced smoke inhalation. Businesses throughout the cannabis supply chain, including cultivators, processors, distributors, and retailers, face exposure from vape products in the event that a defect results in injury or a label fails to include proper warnings. For example, processors that put cannabis into oil form, which is then placed in the vape pen’s capsule, could be pulled into litigation if a claim occurs.
There have been several losses resulting from fatalities due to exploding batteries in vape pens. Most of the incidents can be traced back to five Chinese battery manufacturers. Any vape pen that utilizes these manufacturers will be excluded from coverage by nearly all carriers, making it pertinent to know where all parts are coming from in order to avoid these facilities.
Due to these risks, very few insurance carriers are willing to cover vape products, and those that do offer coverage charge a separate rate for vape and accessory exposure. The difficult nature of securing this coverage has caused many businesses to modify their offering or self-insure.
Throughout the summer of 2019, there have been nearly 200 cases of vaping-related respiratory illnesses reported by doctors and hospitals in 22 states, with one incident claiming the life of a patient in Illinois. While the exact causes of the illnesses are unknown, many of the patients acknowledged vaping cannabis’ high-inducing chemical, THC.6 This development may further complicate insuring vape products in the future.
From seed to sale, businesses throughout the cannabis supply chain have specific risks and coverage needs. Below are the top risks, coverages and gaps to look out for when handling cannabis-related accounts.
The cannabis industry is evolving daily as a result of emerging concerns and new ways to look at coverage forms. With cannabis-related health research just beginning to be conducted and loss data and claims examples still in their infancy, coverage in the cannabis space remains almost exclusively in the E&S marketplace. While there are program solutions available for cannabis-related businesses in the market today, most have insufficient coverage and gaps that leave the insured exposed. Many carriers that have entered the space choose to work with distribution partners that have a strong understanding of the cannabis industry and needs of the related businesses.7
AmWINS has specialist brokers across the United States and in London who are well-versed in the current issues in the cannabis and hemp/CBD space. This expertise allows us to guide our retail clients through the placement process and help them understand all lines of coverage needed to build a comprehensive risk management and insurance program for their insureds.
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Modernized Disgrace Insurance Addresses “Bad Behavior” in the Internet Era
Whether it’s a studio securing an A-list actor for a high-budget film, a sports team landing a marquee player, or a manufacturer hiring a celebrity spokesperson, having a superstar personality associated with a brand can create buzz, deliver success and — most importantly — drive revenue. However, high-visibility individuals can also come at a high unintended price if their misbehavior creates a public scandal.
“Humans misbehave; they always have and always will. Due to the dynamics of modern society —particularly the rise of social media in the past 5 to 10 years — every misbehavior is amplified,” says Janet Comenos, founder and CEO of SpottedRisk.
Whether it’s a controversial tweet, drunk-driving arrest, sexual assault allegation, or other misdeed, celebrity scandals are known instantly by millions or even billions of people. In addition to modern technology, cultural changes have also elevated the outcry around bad behavior.
“The #MeToo movement and general trend toward ‘outing’ people for inappropriate comments and conduct has had a significant impact,” Comenos says. “Sexism, racism, homophobia — there’s a lot less tolerance for that type of behavior, and it’s unlikely the public will return to a pre-#MeToo complacency.”
Disgrace insurance helps companies manage celebrity risk. Typically, policies provide first-party coverage, reimbursing a brand-holder for damages caused to the brand by the actions of a key, high-visibility individual.
Television and movie production companies are the most frequent purchasers of these policies, which have become increasingly important as the exposure to loss has increased. In addition to a surge in the sheer number of television and movie projects, due in part to the popularity of streaming services such as Netflix and HBO that have a high demand for original content, the budgets of those projects continue to climb as well.
“When you have a $50 to $100 million project being produced, it’s a perfect storm if a key individual causes a problem,” says Nick Hanes, Senior Vice President of Underwriting for Spotted Risk.
However, studios are not the only parties at risk: any brand that utilizes a celebrity endorser has a need for disgrace insurance coverage. Potential policyholders include sporting goods and apparel stores, car manufacturers, credit card companies, sports teams, and advertising firms.
“The reality is that it’s not just actors and athletes who misbehave,” Comenos says. “It’s directors, writers, and producers, as well as individuals you might not think of, such as such as chefs, models, and authors. It can also be any executive or high-ranking official who has public visibility and impact on a company or organization,” Comenos says.
The disgrace insurance industry has been around for decades; however, the typical legacy product is ill-suited to deal with the modern climate, in which incidents go viral at the speed of the internet. In the past, limits were low — often just $250,000 — and pricing was high due to lack of underwriting expertise in the exposure. Often, the application and underwriting processes were complex, coverage triggers were ambiguous and subjective, and policies also contained numerous exclusions that significantly diminished the value of coverage provided
For instance, policies typically excluded past acts that came to light during the term, meaning that an unearthed old tweet or video clip that sparked current outrage would not trigger coverage. The actions of a celebrity during the policy term were also excluded if he or she had committed them at any point in the past or if those actions were in line with the celebrity’s “public persona.”
Additionally, claims processes were often long and complex, due in part to the difficulty of determining actual damages and setting a claim payment amount. “’Disgrace’ is not easy to quantify because as much as 90 percent of damages are intangible,” Comenos says.
“Insurers simply weren’t comfortable with the exposure,” Hanes adds. “As a result, the products they offered reflected that lack of comfort and didn’t provide the level of protection they could or should have.”
Disgraceful behavior can lead to a variety of liability claims; however, traditional management liability insurance products respond differently than disgrace insurance. For example, an organization may have sexual harassment claims against an individual and the organization which are covered by an employment practices or sexual abuse policy. The organization may also have claims alleging loss of shareholder value that could be addressed by a directors & officers policy.
“Liability policies are designed to reimburse an organization for public relations expenses, defense costs or third-party damages and don’t provide protection for misbehavior, reputational damage or other intangible impacts on the firm,” says David Lewison, AmWINS’ National Professional Lines Practice Leader. “Disgrace insurance can be used to help defray first-party expenses, such as the costs to reshoot scenes, pull merchandise, or replace disgraced talent.”
SpottedRisk offers a disgrace insurance product that is designed to avoid the problems of legacy forms. With no behavior exclusions and no deductible, SpottedRisk’s form offers limits of up to $10 million.
Using predictive analytics against a database of more than 26,000 famous people, underwriters assess high-visibility individuals affiliated with a brand to evaluate which types of people have the greatest likelihood of being involved in a risk event and determine risk acceptability and pricing. Less than 2% of all talent, including actors, musicians, and athletes, would be uninsurable, and virtually all A-list and B-list talent are insurable.
The policy incorporates a parametric trigger to determine a covered loss and calculate damages. Once notified of a potential “disgrace episode,” such as an assault claim reported in the media, Kantar Research, a third-party survey partner, begins conducting public surveys. These surveys are done on days one, four, and seven to determine how long an event is having an impact on the public psyche. Survey results are kept separate from SpottedRisk, so the claims trigger remains completely objective.
After surveys are completed, a “Public Outcry Score” of the episode is determined, based 50% on the public’s awareness of the event and 50% on perceived severity of the event. This score, ranging from 0-100, determines whether a claim payment will be made and, if so, for how much. For example, a disgrace episode with a public outcry score of 55 would pay 40% of the policy limit, whereas a disgrace episode with a public outcry score of 65 would pay 80% of the limit.
“The purpose of a parametric trigger and an independent, third-party surveyor was to create clarity and eliminate ambiguity around claim payout,” Comenos says.
Post-incident analysis helps to educate insureds about the negative impact of the disgrace event, while pre- and post-event crisis services help to mitigate damage. “We learned that insureds really struggle with disgrace events. They don’t understand just how bad they can be and the havoc they can wreak, not just between an organization and the public, but also within an organization itself. Having an objective measure not only triggers coverage, but also gives the client a clear idea about the event and a conclusion about what to do,” says Hanes.
Disgrace is an ugly and expensive risk for any business that works with entertainers, celebrities, and high-visibility individuals. Through AmWINS, the preferred wholesale partner for SpottedRisk’s modern disgrace insurance product, retail brokers can offer protection to their clients and help manage their risk while avoiding the shortcomings of legacy products.
While coverage for the misbehavior of celebrities, entertainers and athletes is currently available, the disgrace insurance product will soon extend coverage to the financial and reputational implications of misbehavior by executives and high-ranking officials that have public visibility and significant impact on a company or organization. This executive coverage is scheduled to launch in late 2019.
Many homeowners do not understand what exposures are covered under their home insurance policy, according to a new consumer survey.
More than two in five Americans (41 percent) believe that a standard homeowner’s insurance policy protects against mold damage, according to new InsuranceQuotes.com survey.
“This misconception could prove extremely costly,” said Robert J Russell, insurance broker-owner, InsurancePricedRight.com. “Mold remediation can cost tens of thousands of dollars. It’s often not covered by homeowner’s insurance, especially if it was caused by neglected maintenance such as a leaky pipe.”
The survey also revealed that many homeowners are misinformed regarding personal belongings stolen from a car (73 percent aren’t aware that this type of theft is covered by homeowner’s insurance) and earthquake damage (51 percent don’t know that this is not covered by a standard homeowner’s insurance policy).
Two better understood aspects of homeowner’s insurance are fire damage (90 percent of Americans know that homeowner’s insurance covers this) and lawsuits from an injured visitor (72 percent know this is covered).
Just under one-quarter of homeowner’s insurance policyholders said that they chose their current provider primarily because of a recommendation from someone they trust (22 percent). A similar number (21 percent) said the most important factor was the service they received from their agent. Seventeen percent said their decision hinged on getting the lowest price. But only 1 percent of homeowners insurance purchasers said a radio or television commercial was the most important factor in their decision.
The survey was conducted by Princeton Survey Research Associates International (PSRAI). PSRAI obtained telephone interviews with a nationally representative sample of 1,003 adults living in the continental United States. Telephone interviews were conducted by landline (500) and cell phone (503, including 229 without a landline phone). Interviews were done in English by Princeton Data Source from April 4-7, 2013. Statistical results are weighted to correct known demographic discrepancies. The margin of sampling error for the complete set of weighted data is plus or minus 3.7 percentage points.
When it comes to cybersecurity, Americans say they are concerned, but many are not taking the preventative steps needed to protect themselves from a cyber attack.
According to Chubb’s Third Annual Cyber Report, complacency seems to have taken hold: eight-in-10 Americans continue to be concerned about a cyber breach, yet only 41% use cybersecurity software and 31% regularly change their passwords. These numbers are virtually unchanged from 2018.
“When it comes to your cybersecurity, there’s no such thing as being over prepared,” said Fran O’Brien, division president of Chubb North America Personal Risk Services. “While it’s important that the vast majority of respondents remain concerned about a breach, concern itself isn’t enough. “
O’Brien said the lack of cybersecurity action is because people think it’s too time consuming. “But implementing cyber safeguards today will save time and financial resources tomorrow, should a breach occur,” she said.
Businesses aren’t much better about cybersecurity.
For instance, while a consistent number of individuals (75% and 70%) say that their company has “excellent” or “good” cybersecurity practices in place from 2018 and 2019, many companies continue to fail to implement the most basics of safeguards. From 2018 to 2019, there was virtually no change in the percentage of companies that hold annual employee trainings (31% and 33%), deploy filters for online content (38% and 40%) and leverage social media blocks (32% and 33%).
About 19% of respondents say they learn about cybersecurity protections through their employer, while more than a third say they most often learn about how to protect against cybersecurity risks from mainstream media (35%), and family and friends (34%). Chubb says this “education gap” means employees and individuals cannot spot incoming attacks — while 54% of respondents correctly defined ransomware—a form of malware that restricts access to files unless a ransom is paid—this was the only common form of attack that a majority of individuals could correctly identify.
According to Chubb, the continued failure to implement cybersecurity safeguards means a breach is inevitable. Yet, just 10% of respondents report having a cyber insurance policy in place.
According to Chubb’s online study, individuals don’t recognize the value of individual pieces of personal data. For example, just 18% of respondents are concerned about their email addresses being compromised. Similarly, only 27% of respondents cite concern about their medical records being breached.
Survey results indicate that a consistently large portion of older respondents employ better cyber practices than younger generations. Per the survey, 77% of those 55 years and older delete suspicious emails, compared to half (55%) of respondents between 35 to 54 and just a third (36%) of respondents from 18 to 34. Similar patterns arise when looking at those enrolled in cybersecurity monitoring services, ac cording to the survey.
More concerning is that the behavior of younger generations appears to be getting worse. For example, 76% and 74% of adults over 55+ regularly deleted suspicious emails in 2017 and 2018, respectively, as compared to just 47% and 40% of adults between 18 and 34 during the same time period.
Conducted by Dynata, the online survey was fielded between May 7 – May 17, 2019. The results are based on 1,223 completed surveys.
For the fifth straight year, Vermont had the best insurance regulatory environment in the United States, according to the R Street Institute’s recently released Insurance Regulation Report Card, an annual examination of which states best regulate the business of insurance.
Low politicization, ahead on financial exams, competitive auto market, competitive homeowners market, small residual markets, and broad underwriting freedom were listed as strengths on Vermont’s “A+” report card. Weaknesses included a large regulatory surplus, large tax and fee burden, and excess auto insurance profits.
Louisiana had the worst score in the country, edging out second-to-worst New York. Louisiana’s “F” report card listed no special strengths and a laundry list of weaknesses: Politicized market, large regulatory surplus, large tax and fee burden, concentrated auto market, very high auto loss ratio, excess homeowners profits, large homeowners residual market.
The biggest improvements were seen in Connecticut (from a C+ to a B), Delaware (from an F to a C) and New Hampshire (from a B- to a B+). The biggest declines were seen in South Carolina and Ohio (both from a B to a C).
In the 2018 report, R Street Senior Fellow and Director of Finance, Insurance and Trade Policy R.J. Lehmann addresses three fundamental questions: 1) How free are consumers to choose the insurance products they want? 2) How free are insurers to provide the insurance products consumers want? 3) How effectively are states discharging their duties to monitor insurer solvency and foster competitive, private insurance markets?
“In 2018, we saw progress toward more competitive insurance markets,” Lehmann said. “Residual property insurance mechanisms continued to shrink. Several states, notably Missouri, moved to loosen systems for filing rates and forms in the commercial insurance space. On the other side of the ledger, Illinois—long among the most free-market insurance environments in the nation—introduced stringent controls on its workers’ compensation market after overturning Gov. Bruce Rauner’s veto.”
The insurance market is both the largest and most significant portion of the financial services industry to be regulated almost entirely at the state level. While state banking and securities regulators largely have been pre-empted by federal law, Congress reserved to the states the duty to oversee the “business of insurance” as part of 1945’s McCarran-Ferguson Act.
The 2018 Report includes a review of the past year in insurance regulation at both the federal and state levels. Variables in the state rankings are weighted to provide balance between considering the rules a state adopts and the results it demonstrates, between the effectiveness regulators demonstrate in their core duties and the efficiency a state shows in making use of its resources.
Top 10 States by Total Score
Another strategy — group captives — has become an increasingly popular way for small- and medium-sized employers to help control current health benefit costs. Like-minded employers, grouped by organization type or region, get together to theoretically insure homogeneous risks through a captive insurance company. Captives are legal entities separate from the sponsoring organizations.
Among the advantages of insuring through a captive include potentially lower insurance costs, retained profits when claims are low, plan design flexibility and coordinated plan administration.