The Cash Crop King: How U.S. Federalism Makes It Difficult to Insure the World’s Most Lucrative Crop

Rory Svoboda

Associate Editor

Loyola University Chicago School of Law, JD 2022

On June 25, 2019, Governor Pritzker signed the Illinois Cannabis Regulation and Tax Act, legalizing cannabis for adult use in Illinois. Cannabis is the most lucrative crop globally and the cash-making abilities of cannabis have been proven true in Illinois. Sales in the state exceeded $1 billion in the first full year of legalization, resulting in a $205.4 million tax windfall for Illinois. This success, however, is no small feat for cannabis companies considering the banking and insurance obstacles they must overcome to start this type of business. Federalism is at the heart of many of these hurdles.

The cannabis supply chain –– where is insurance needed?

The cannabis supply chain includes cannabis cultivation, processors/harvesters, manufacturers, retailer, distributors, testing labs, and microbusinesses. At virtually every level of these businesses, insurance is needed –– from equipment and crop insurance to workers’ compensation. In Illinois, cannabis dispensary operators require $50,000 surety bonds with the Illinois DFPR, Division of Professional Regulation as obligee. Cultivators also must provide evidence of financial responsibility in the amount of at least $2,000,000, payable to the Department of Agriculture. Additionally, all Illinois employers must provide workers’ compensation coverage to employees.

The issues created by conflicting federal and state laws

Cannabis remains illegal under federal criminal law and is classified as a Schedule I drug. Yet Illinois, 14 other states, and Washington, D.C., have legalized the drug for recreational adult use. This has been made possible by the fact that federal prohibition and state permission does not automatically create a positive conflict under the Tenth Amendment and preemption principles. Nonetheless, federalism still makes navigating banking and insurance regulations in the cannabis industry quite difficult.

Cannabis businesses are required to operate on an all-cash basis and are unable to accept credit or debit cards due to federal banking law. This is because any contact with money that can be traced back to state cannabis operations is considered money laundering –– a federal crime –– exposing banks to major legal and regulatory risks. Banking restrictions also indirectly affect cannabis businesses. Many national banks provide mortgages, which makes leasing space difficult. Andy Grossman, head of capital markets at an $8 billion cannabis business, explains it’s “hard to find a landlord that doesn’t have a mortgage with Wells Fargo…and Wells Fargo says, ‘Not in my building.’”

By the same token, many insurers, like banks, are unwilling to work with cannabis companies due to conflicting federal and state laws. A 2020 report from New Dawn Risk found that there are only six large insurers that offer cannabis coverage in the U.S. market. As a result, cannabis businesses must obtain insurance through smaller state-based insurers, which means coverage is limited and premiums are high. For instance, property coverage can cost as much as seven to ten times what traditional manufacturers and retailers pay. The primary challenge in encouraging insurers to write coverage in this industry is the “lawful purpose” requirement of a contract. Since cannabis is federally illegal, the argument may be made that the insurance policy is illegal and many insurers and re-insurers aren’t willing to take that risk.

Lack of federal legalization inhibits growth and inflates risk

Between a general lack of willingness to insure cannabis businesses and inflated prices for those that do, growth in the industry is being inhibited. Capacity and rate issues would all but disappear with the federal legalization of cannabis. However, whether legalization will happen in the near future is unclear. Grossman anticipates that Congress will instead opt for piecemeal legislation that ameliorates some of the banking and insurance issues that cannabis businesses face.

One example of this “piecemeal” legislation is the Secure and Fair Enforcement (SAFE) Banking Act. This bill would, among other things, prevent a depository institution from being liable or subject to forfeiture for providing a loan or other financial services to a legitimate marijuana-related business. Congress has also introduced the Clarifying Law Around Insurance of Marijuana (CLAIM) Act, which would generally provide a safe harbor from penalties or other adverse agency action for insurance companies that provide services to cannabis-related businesses. The cannabis industry employs over 250,00 people nationally and creates massive tax revenues for states where legalization has passed. Congress should note these benefits and pass the SAFE Banking Act and the CLAIM Act.