Thirty-four states and the District of Columbia have legalized marijuana for adult or medicinal use to date. And yet cannabis remains a controlled substance under U.S. federal law.

This major disparity leaves U.S. businesses caught in the middle.

The differing legal treatment of cannabis under federal and state law has become a civil liability for business executives investing in cannabis companies, insurance brokers and underwriters looking to insure these fast-growing organizations and bankers looking to provide cannabis businesses with necessary financial services.

If the Secure And Fair Enforcement Banking Act is approved, banking will see some relief soon in the form of the Secure And Fair Enforcement (SAFE) Banking Act of 2019. The Act, aimed at ensuring access to financial services for cannabis-related businesses and service providers, will prevent criminal prosecution for bankers engaged in lending to legitimate cannabis-related businesses.

Similarly, the Strengthening the Tenth Amendment Through Entrusting States - otherwise known as the STATES Act - was recently reintroduced in the Senate. The STATES Act restricts the federal government from interfering with state cannabis laws across industries.

Until these proposed regulations become law, bankers, insurance brokers and underwriters will continue to face the disparity between state and federal law head-on when insuring cannabis companies.

If the Secure And Fair Enforcement Banking Act doesn’t pass, the gap between federal and state cannabis laws will remain. Until federal legislation rectifies the issue, bankers, insurance brokers and underwriters alike will face challenges when lending to and insuring cannabis operations.

Regardless of what happens, the following roadblocks are at the core of the issue for U.S. businesses:

Directors & Officers lawsuits — Although the fast-paced growth of cannabis companies promise investors and board members ample returns, the risks may be just as great. Some companies and their employees have come under fire for allegations of fraud and overvalued earnings, while others have gotten caught between federal and state laws.

Before signing on to invest or advise, make sure the cannabis company has a policy and review its limits. Is it enough to indemnify an investor, director or officer in the event of a lawsuit? Active investors or advisors who sit on multiple boards should consider an independent D&O policy. Having one will protect personal assets should the director or officers be caught in a lawsuit and the organizations you’ve invested in are unable to fully indemnify you. (See D&O cannabis industry blog).

Property loss and damage — Federally-subsidized crop insurance is not an option for fields growing industrial hemp, as coverage requirements hit $50K/acre, compared to $1K or less/acre for wheat or corn. (see Farm Bill blog) Traditional commercial property policies are not a solution for indoor Cannabis operations. Instead, cannabis requires a specialized property coverage, with separate policies for different growth stages, including seedling, living plant and fully harvested.

Additionally, general liability, and commercial renter’s insurance policies all exclude aspects of cannabis operations, leading to significant gaps. Tenant-occupied commercial policies exclude coverage for buildings engaged in activities deemed illegal by the federal government. Review property policies and any potential exclusions related to cannabis operations.

Prohibited transportation — Many policies do not cover transportation of cannabis, as transporting a federally-deemed narcotic in a vehicle (commercial or otherwise) is prohibited. In some states, a separate permit is required for cannabis transportation. Remember that transporting cannabis across state lines (even when legal in both states) is still illegal due to federal law as well.

Contact your HUB Risk Services or cannabis expert to find out more about negotiating the right language into your D&O, property and transportation coverages.