Marijuana Insurance in the Wake of Lloyd’s Exit

As reported by the Marijuana Business Daily, Lloyd’s of London is planning to exit the cannabis insurance industry. This is pretty big news, as Lloyd’s currently underwrites the vast majority of insurance policies for cannabis businesses nationwide.

Historically, Lloyd’s has been the go-to marketplace for insurance policies difficult to find elsewhere. Lloyd’s got its start over 300 years ago as a coffeehouse for shipowners and financiers to meet and discuss private insurance contracts. Fast forward to today, and things are not totally different for Lloyd’s. Rather than being an actual insurance company, Lloyd’s is a marketplace, where members come together to form syndicates, which themselves pool capital resources to insure a variety of risks. Lloyd’s has long prided itself on being able to price risk that doesn’t fit into neat boxes on which other insurance companies rely.

The people at Lloyd's? No, just a bunch of chickens.
The people at Lloyd’s?  No, just a bunch of chickens.

In the cannabis marketplace, U.S. based insurers have acted as brokers for policies funded by Lloyd’s syndicates. An agent in Nevada or Washington or Oregon or Illinois or wherever will write and price a policy based on requirements put together by Lloyd’s. This has led to requirements of which many of you are familiar — certain amounts of marijuana need to be kept in safes vs. displayed for retailers, weight requirements for safes, building security requirements, etc. In return for paying the premiums and abiding by the policy requirements, Lloyd’s members would agree to cover general liability for marijuana businesses, property insurance for cannabis real estate, and potential product liability and mislabeling claims, among other types of insurance.

Cannabis businesses will now need to turn elsewhere for their insurance needs. In a memorandum drafted by Tom Bolt of Lloyd’s to its members and to the brokers that sell the policies, Lloyd’s new policy is made clear: “Any policies of this type that are currently in force should not be renewed and no new business should be written.” Lloyd’s, it seems, is becoming more cautious of the kind of liability that banks and other financial institutions have been fearful of. Handling funds for marijuana businesses still doesn’t jibe with U.S. federal law, specifically anti-money laundering law. With nothing more than federal memoranda saying that cannabis businesses are of low enforcement priority, Lloyd’s has decided that it just can’t properly price the risk of its potential liability.

What is not so clear is why Lloyd’s wrote cannabis insurance policies in the first place. It is also not clear why it is pulling out now, when the legalization momentum is clearly on the upswing.

Business owners whose policies Lloyd’s currently underwrites should probably get in touch with their insurance agents to figure out an alternative. Hannover Re, a German insurance company, and a few others out there continue to underwrite policies. But with the biggest fish out of the market, there is fear that premiums for new policies will skyrocket in price. Not to mention that there continue to be few data points for pricing risk. Products liability, for example, has been notoriously difficult to insure, as underwriters do not have sufficient examples of marijuana products liability litigation to understand the potential risks and damages. In the absence of these data points, it would be nice for the insurers to have other companies on the market pricing the risk separately, to act as a check on their work to make sure that they are in the same ballpark, and to provide some level of price competition.

Lloyd’s leaving the cannabis industry is not good news as cannabis businesses will now have to scramble to get insurance that is generally required by both their state regulations and their private leases. At the same time, there are others already out there that offer services, so it is not as though insurance policies will be completely unavailable. The vacuum in the market may pull in new capital from within the U.S. that has been looking for ways to engage with the industry. Time will tell, and we will keep you updated on developments along the way.

In the meantime, we as cannabis lawyers are disappointed that a company that once had the guts to get in has now pulled out and we worry that others in similar and other industries may follow, just when we are getting oh so close to the tipping point for nationwide legalization.

How do you see this evacuation by Lloyd’s?