The comment was made based on the belief that the state should not require cannabis businesses to buy insurance products that hide the ball on the extent to which they cover cannabis risks (and leave open arguments that they do not cover such risks at all) and, indeed, that it should be unlawful for any insurer to sell such products to industry operators in California.
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I write to comment on the Bureau of Cannabis Control’s (the “Bureau") Proposed emergency regulations determined by the Bureau to be necessary for the immediate preservation of the public peace, health, safety, or general welfare, which proposed emergency regulations are currently under review by the Office of Administrative Law. The following comment specifically addresses proposed California Code of Regulations, Title 16, § 5308. Insurance Requirements.
The Bureau of Cannabis Control has revised Rule 5308 in ways that are very helpful for the industry. Allowing licensed distributors to satisfy their insurance requirements through captive and non-admitted insurance carriers acknowledges the dearth of admitted insurers serving the cannabis market and allows licensees to obtain coverage that will likely be less expensive and provide greater effective coverage than if the Bureau had maintained the previous draft rules’ requirement that insurance under Rule 5308 be purchased through an admitted insurer.
The proposed rules should, however, go further. I would propose the addition of a subsection (f), as follows:
(1) No commercial general liability insurance policy issued to a licensee shall include any unqualified exclusion of cannabis or cannabis products or any exclusion of controlled or banned substances that does not expressly except cannabis.
(2) Any insurance company issuing a commercial general liability policy to a licensee shall state expressly in such policy what cannabis-related risks are covered under the policy and what cannabis-related risks are excluded.
(3) Any commercial general liability insurance policy issued to a licensee that does not comply with subsections (1) and (2) shall be interpreted by any court or other trier of fact to contain no exclusion of cannabis or cannabis products. Any condition or exclusion contained in such non-compliant commercial general liability insurance policy shall be interpreted in favor of coverage for all cannabis-related risks to which the policy’s language is reasonably susceptible.
Insurance policies issued to cannabis companies in California and throughout the country regularly contain exclusions that effectively eliminate or substantially limit the insurance coverage provided. Some of these exclusions are expressly stated, but others are more well-hidden. Indeed, because of the complicated legal status of cannabis in California, many of the ways in which policy language limits coverage for cannabis-related liability may be unintentional. Requiring that policies be endorsed to expressly define the scope of coverage for cannabis-related risks will serve to prevent future conflicts. Doing so will also further the policy objectives of Rule 5308. Mandating that distribution licensees maintain commercial general liability insurance is only beneficial from a policy perspective to the extent that such licensees obtain genuine coverage for their risk exposure. If the State expects cannabis companies to acquire such coverage, policy language must be more clear around the fundamental risks inherent in cannabis operations.
California would not be the first to impose such a requirement. On June 29, 2017, Oregon ’s Department of Consumer and Business Services Division of Financial Regulation issued Bulletin DFR 2017-04, which required all property and casualty insurance companies to "explicitly stat[e] the extent to which marijuana items and activities are excluded.” Oregon did so for the reasons discussed herein: To provide certainty to insurers and insureds in an area in which state legality and federal illegality create potential ambiguities in general exclusionary language contained in insurance policies.
Thank you for your consideration.
Jason M. Horst
Horst Legal Counsel