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Cannabis businesses are thriving, but these workers’ comp hurdles remain

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With paradoxical legal status, cannabis use is causing some headaches for the workers’ compensation industry.

Cannabis is now legal for recreational use in a third of U.S. states, and for medical use in 20 more, but it is still illegal under federal law.

This paradoxical status has serious implications for the industry — including a lack of access to the federal banking system — that greatly complicates many aspects of the business, including insurability in general, and workers’ comp in particular.

One of the biggest impacts is a shortage of carriers willing to insure cannabis businesses.

“It boils down to capacity,” said TJ Frost, president of Symphony Grow and Symphony Risk Solutions.

“If we were insuring a construction company, we’d have 200 carriers that we could go to market with and get quotes and have competitive pricing, where in the cannabis space … you have anywhere from 20 to 40 carriers that will insure it. And all their rates are different. Their policy forms are different. Their offerings and their capacity are different.”

And most of those carriers are in surplus lines.

“I would say, 90% of the carriers that we’re currently dealing with are in the surplus lines market, which has its own challenges,” Frost said. “Their rates are a little bit more, and then there’s fees and taxes that are involved.”

Cannabis Challenges for Workers’ Comp

“Workers’ comp is a standardized coverage. We need more capacity, more carriers, but they’re still not willing to enter the marketplace because cannabis is not federally legal,” said Frost, who also pointed out that the industry’s regulatory oversight and specialization actually make it a fundamentally better exposure, especially in the retail, cultivation and distribution segments.

According to Jay Virdi, chief sales officer for the Cannabis Specialty Practice Group at HUB North America, carriers cite a variety of reasons for avoiding the cannabis space.

“I’ve heard all the objections,” Virdi said. “First it’s reputational, it’s not federally legal; we have treaty exclusions and our reinsurers are not allowing this.”

He said the lack of capital and resulting high prices cause some cannabis operations to forgo adequate coverage.

Another complication is the constant risk that cannabis companies’ bank accounts can be suddenly closed or frozen, causing cancellations or necessitating rewrites.

“A number of these insureds have backup entities and FEINs that are ready to roll a new bank account just in case it gets canceled. That causes a lot of rewrite activity on our front, cancellation activity, and it’s really tough,” said Cameron Ward, vice president commercial programs at CannGen Insurance Services, LLC, where he runs the workers’ comp department.

This is particularly problematic in workers’ comp.

“It’s the number one issue that comes up when writing the workers’ comp line, just, ‘Can they keep this bank account open?’ ” said Ward, who sees multiple accounts each week needing rewrite because of problems with bank accounts.

Exacerbating the issue is that workers’ comp lines are generally based on the payroll-paying entity.

“It’s not the operating entity, it’s not the license entity, it’s specifically the entity filing the 941s that needs to be insured for workers’ comp,” said Ward. “And thus, they need to have a bank account, and that’s still really hard for these individuals to hold those bank accounts open and supply consistent payroll checks for their employees and not have to switch bank accounts and insured names and all that comes with that.”

To Read The Rest Of This Article By Jonathan McGoran on Risk & Insurance

Published: September 21, 2022

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