The risk of being an Insurance Agent for the medical marijuana industry
Even us Insurance Agents have a risk in the mmj industry.
Greenpoint Insurance
Financials see green in growing licensed marijuana industry
By Mindi Westhoff
SNL Financial
At first glance, the policies sold by Greenpoint Insurance Group owners J.B. and Mary Woods seem apropos for most any retail business, as lines such as general liability and business income coverage are common inclusions in their packages.
But the Woods have no misgivings about the unique product their clients offer and what they, in turn, insure: Medical marijuana.
The business of cannabis dispensary and crop insurance caters to a focused but growing segment of the retail industry, the Woodses said. Professional liability protects pharmacists who make recommendations to medical marijuana patients. Crop insurance, which Greenpoint has only been able to offer since the start of 2010, offers growers protection against, among other things, fire, flood and theft, the last of which Mary Woods said is the No. 1 concern for most dispensary owners and marijuana crop growers.
The threat of theft is exceptionally high for dispensaries because of the cash-only nature of many of the businesses, said Allen St. Pierre, executive director of the National Organization for the Reform of Marijuana Laws.
Because most banks will not provide lending to dispensaries due to federal laws against marijuana, St. Pierre said the roughly 4,000 “cannabusinesses” in the U.S. are forced to deal with university credit unions, “sketchy” regional banks that “go down on almost any given weekend,” or worse.
“Some of these folks must have the biggest mason jar collection you can imagine. They must have Tupperware stuffed to the brim with cash,” he said. “The banks are leaving hundreds of millions of dollars a year in fees [on thetable].”
A growing industry
While the Woodses would not reveal the names of the policy underwriters for competitive reasons, J.B. Woods said the underwriters for Greenpoint were “major” companies with A ratings or above. Many are domiciled in the U.S., but some are overseas. All of them specialize in medical marijuana insurance.
In the 17 years the Woodses have offered insurance packages to medical marijuana dispensaries, the pair have watched average six-month premiums slide from between $15,000 and $17,000 to closer to the $5,000 to $6,000 range, with some as low as $2,000, as more and more carriers have entered the marketplace. The increased competition is bittersweet for insurance brokers like Greenpoint, since more players also means a legitimization of the market, and the Woodses expect to see the business grow.
“I think it’s being considered by more insurance companies out there,” Mary Woods said. “I think they see the opportunity, due to the fact that there are so many legal states right now.”
So sure that the business of protecting medical marijuana dispensaries is about to explode, the Woodses have licenses to insure the businesses in Colorado, California, Montana and Oregon and are awaiting the approval to write policies in New Jersey, New Mexico, Michigan and Washington as well.
“This will become a national program for us,” Mary Woods said.
High profits, risky business
The threat of legal action on a federal level has kept some major money-center banks such as Wells Fargo & Co. and Bank of America Corp. from approving new accounts for medical marijuana dispensaries. Although medical marijuana is now legal in 14 states, it is still very much illegal at a federal level, and no safe harbors have been put in place protecting banks or insurance companies from being prosecuted, said law firm Fenton Nelson LLP founder Harry Nelson, who also co-founded the Medical Marijuana Law Group.
“The statements of nonenforcement have focused on patients who use it or providers who recommend it. It has not focused on all these ancillary services,” Nelson said of medical marijuana. Although there is no known case of the federal government taking action against a bank for lending to a dispensary, “nobody wants to be the first one to be tagged for it,” he said.
The level of risk can be viewed as different for a small bank versus a national bank, but the differences are even more noticeable between a bank and insurance company, Nelson said. While all can be pegged for aiding and abetting a dispensary, the assistance provided by a bank is more direct, while insurers can make the argument that they are only insuring for a potential loss. Only once a claim is actually paid out, and only then if that claim is directly related to an illegal product, can an insurer hypothetically be charged, he said.
Regional banks, while broadly held to the same regulatory standards as their larger brethren, tend to maintain lower profiles, and some could make the argument — albeit tenuous, according to Nelson — that their businesses are intrastate if they solely conduct banking operations in California, Colorado or any of the states where dispensaries are legal.
There is “very limited” permissiveness for depository institutions operating purely intrastate in the states that have decriminalized marijuana, Nelson said. “But a regional bank that had any kind of interstate transaction would be at the same risk as a national bank,” he added.
The Woodses discovered this fact in early May, when the pair made calls to 50 local banks in Colorado to determine for their clients which ones would be willing to simply open a checking account for a dispensary. The response was bleak.
“We had two,” J.B. Woods said.
Rolling out new rules
A handful of banks in the Woods’ survey said they were considering the prospect of opening accounts for dispensaries, but the remaining 42 voiced a loud and clear “No.” From a conservative business point of view, St. Pierre admitted that the banks are probably right to be cautious, despite the recent Oct. 19, 2009, “Ogden Memo,” which provides guidelines that offer some protection for those who use and sell marijuana, so long as they comply with state laws.
“Even with that in place … you would be rue to make the advice to the CEO or CIO or whoever that this is a business endeavor or an underwriting they should undertake,” St. Pierre said. “Technically speaking, if someone is selling marijuana, they’re taking in cash. They hand it to a bank or insurance company, [and] by any strict reading of the law, that’s a RICO conspiracy.
Despite the risks of violating antiracketeering laws, the opportunity for the financial services industry to jump on board with medical marijuana dispensaries is an attractive one, and St. Pierre pointed to the growing number of hedge funds actually buying medical cannabis businesses.
Texas-based International Merchant Advisors announced March 15 that it would purchase medical marijuana company Organic Science Inc., followed by news in April that it would operate the Healing Arts Cooperative Medical Marijuana dispensary in San Diego. There are untapped opportunities in the insurance field as well, St. Pierre said.
“Even if you can walk into one of these places and buy a ball of hash the size of your fist, that doesn’t negate the fact that you can’t get health insurance,” he said of medical marijuana users. “You can’t get life insurance often.”
The conflicting laws that limit banks’ ability to access this segment of the retail market are ones that several lawmakers hope to change, including 15 members of Congress who on May 20 submitted a letter to Treasury Secretary Timothy Geithner asking for formal, written guidance that assures banks will not be prosecuted for doing business with medical marijuana facilities.
As much as the pending legislation would open up opportunities for banks, the Woods said that a ballot in November to legalize marijuana for recreational use in California would also mean a huge boom to business for the insurance market.
“If that is passed, I think that is going to change the dynamics of this industry forever,” J.B. Woods said. “It’s going to cause more and more people who have been on the fence to actually jump into this business.”
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