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The legalized cannabis industry is rapidly evolving, with new, chemically concocted variants popping up almost monthly. On top of that, management of marijuana and hemp businesses is going through changes, with “weed cowboys” clashing with button-down capitalists — not to mention a growing number of mergers and acquisitions across the country.

All of that has created a world of both risk and opportunity for insurance companies, according to cannabis legal experts who spoke Wednesday at Insurance Journal’s Insuring Cannabis Summit 2022 panel discussion.

“Yes, hemp is legal to manufacture, but it doesn’t necessarily mean that all these products out there – that you can walk into virtually every store and purchase – are actually, federally legal,” said attorney Michael Sampson, who teaches a course on cannabis law at the University of Pittsburgh School of Law.

One of the trickiest areas facing the industry and insurers is that just in the last two years, labs around the country have developed and are continuing to develop new products that may appear to be legal. Some of these are made with concentrated compounds found in marijuana or hemp plants, while others are produced through chemical processes.

“I advise my clients to steer clear of chemically created products that are not found naturally in the plant,” said Rod Kight, a North Carolina lawyer who specializes in cannabis business law.

The risk, Kight said, is that if the compound is not found in Mother Nature, a judge could easily decide that it is a controlled substance, illegal under federal and state laws. That could bar coverage and defense under most insurance policies.

The 2008 federal farm bill legalized hemp for most practical purposes, allowing hemp products to be sold in stores, the lawyers explained. But recently, tinkering has produced substances that can technically be called red hemp, with a low concentration of the high-inducing tetrahydrocannabinol, or THC. But in large enough volumes the substance can give the user a potent buzz. Products by the name of “Delta 8” and “Delta 9” are among the varieties on store shelves now.

The jury is still out on the legality and insurability of some of these products and the liability of their distributors. These new products may expand the industry while they’re expanding minds, but they also create concerns for underwriters, Kight said.

Here’s a look at some of the other legal and insurance issues wafting through the weed industry:

The Wild Weed West

The booming marijuana industry is full of people who are highly risk-tolerant but less apt to pay attention to paperwork. This can lead to conflict with the money guys and with other directors in the company, especially if a lawsuit or legal problem arises, said Katy Young, of San Francisco, a former president of the International Cannabis Bar Association.

In many cases, cannabis growing or distribution companies have not fully documented who their directors and officers are, or who the shareholders are, which makes it difficult to secure insurance coverage when it’s needed most.

“A lot of the litigation comes from a lack of education on the part of the groups that partner together to make a cannabis business successful,” Young said. “There’s a ton of litigation now, and I don’t see it going away anytime soon because it’s just so complicated to manage a cannabis business. There’s just so much that can go wrong.”

In other cases, business owners and managers are so focused on the perceived benefits of marijuana products that they don’t realize their liability insurance policies carry exclusions – for injuries that may result from vaping, for example.

A lot of company owners have a good sense of the issues and risks involved, “but they don’t have the knowledge or the time to get into the weeds of an exclusion,” Sampson said with a straight face. “There’s nothing worse than going to a company owner and saying, ‘Did you know that you’re not covered for this?'”

Sampson suggested that marijuana companies should consider multiple D&O policies to close the gap on exclusions.

And perhaps more than anything, the weed world may be particularly vulnerable to cyber attacks. Legalized marijuana products are usually tracked by computer from seed to sale, and, for medical marijuana products in many states, records can include personal and medical information on clients.

“You darn well better have cyber insurance,” Sampson said.

Firms may also need business interruption, professional liability and product recall coverage. Accuracy in labeling is another concern, the panel members said. It’s important to make sure that products contain the amount of active ingredients as advertised, and that the products don’t contain foreign substances that can be deemed harmful.

Changes, Opportunities, High Notes

The cannabis business is changing in a number of ways, the panelists said. Directors and officers are, in fact, becoming more sophisticated as the industry begins to mature. More are actually reading their insurance policies and exclusions. Smaller companies are being snapped up by larger firms with experienced legal counsel and insurance experts.

And insurance coverage, once hard to find, is becoming more available, said Ian Stewart, moderator of the panel and founder of the cannabis law practice at the Wilson Elser law firm. Also, if Congress legalizes weed products on a federal level, that will mean a flood of new and larger companies into the market, all with insurance needs.

Mergers may also create a greater need for representations and warranties insurance coverage, Stewart said.