Michigan has adopted new legislation that unintentionally may make Michigan cannabis companies and their insurers scramble to determine how to comply with onerous regulations around mandatory product liability insurance. Without materially consulting the insurance industry on the feasibility of new insurance mandates, the state has surprised everyone with what appears to be a “leap before you look” decision that is likely to cause unintended problems for the state’s cannabis businesses.
Michigan’s New Mandatory Insurance Requirements for Cannabis Businesses
The new requirements are set forth within Michigan’s Senate Bill (SB) 461 and Public Act (PA) 55, which are described briefly below.
Michigan Senate Bill 461
The bill, approved by Governor Whitmer in late December 2021, mandates product liability insurance coverage by licensed cannabis businesses. It provides that every licensee or license applicant must file with the state’s Marijuana Regulatory Authority (MRA) “proof of financial responsibility” of at least $100,000 per license for liability for bodily injury resulting from the manufacture, distribution, transportation or sale of “adulterated” cannabis or cannabis products.
The bill defines “adulterated” cannabis as “a product sold as marihuana that contains any unintended substance or chemical or biological matter other than marihuana that causes adverse reaction after ingestion or consumption.” “Bodily injury” is defined to exclude the “expected or intended effect or long-term adverse effect of smoking, ingestion, or consumption of marihuana or marihuana-infused product.”
To meet this obligation, the licensee must obtain a liability insurance policy that meets the following statutory requirements:
Is issued by a licensed insurance company (or licensed captive insurance company) in this state.
Does not include a condition, provision, stipulation, or limitation … that relieves the insurer from liability for the payment of any claim for which the insured may be held liable under the act.
Covers bodily injuries to a qualifying patient, including injuries that are caused by the intentional conduct of the licensee (but not if the licensee acted with the intent to harm).
SB 461 further requires an “attestation of compliance” signed by an officer of the licensed insurance company. Failure to maintain the required insurance will result in mandatory suspension of the cannabis license. In addition, the insured licensee must provide 30 days’ written notice to the MRA prior to canceling the liability insurance, and must provide new proof of insurance within 30 days after providing such notice.
A legislative analysis of the bill explains that the purpose of the new law is to avoid insurers relying on certain exclusions to bar coverage when a consumer sues a licensee for harm allegedly caused by the licensee’s product. The legislative analysis states that “some policies issued by insurers to licensees contain certain policy exclusions that could be interpreted by courts as precluding coverage for a claim relating to that exclusion.” The analysis then mentions a “blanket exclusion” barring coverage for substances “whether or not the substance is prohibited or allowed under [Michigan’s Medical Marihuana Facilities Licensing Act].” The new law is an attempt to avoid the situation where a licensee “may find that its policy would not cover a claim made by a person alleging harm from ingesting a product containing one or more of the listed substances.”
Public Act 55
PA 55, which took effect on October 11, 2021, adds section 11a to the Michigan Regulation and Taxation of Marijuana Act, prohibiting licensees from selling or transferring marijuana to a minor or to a person who is visibly intoxicated at the time of sale. In addition, it allows individuals who are injured or who suffer damage by a minor or visibly intoxicated person to take action against the licensee who sold or transferred the marijuana. Section 11a requires Michigan cannabis retailers and microbusiness licensees to maintain insurance coverage “provided by a licensed and admitted insurance company in Michigan” in a minimum amount of $50,000 for actions brought under section 11a.
The Cannabis Industry Is Insured Primarily by the Non-Licensed Surplus Insurance Market
The most obvious problem with SB 461 and PA 55 is the requirement that insurance policies may be issued only by “licensed” or “admitted” insurance companies in Michigan. A licensed or admitted insurance company has submitted its forms and rates for approval by the Michigan Department of Insurance and Financial Services and may not deviate without permission. Admitted insurers are strictly regulated, must comply with state-mandated reserve requirements and may be guaranteed by the state in the event of insolvency.
Non-admitted carriers provide coverage for risks not available within the admitted market. Sometimes called the “safety valve” of the insurance industry, these surplus lines insurers fill an important need by insuring non-standard or high-risk activity that is declined by the admitted market. Surplus lines carriers often focus on developing innovative insurance for new products or industry sectors that lack a loss history and other actuarial metrics used for pricing. Unlike admitted insurance products, surplus lines coverage has the ability to react to evolving risks and market conditions by quickly changing forms and pricing. Surplus lines insurance often evolves into a standard product in the admitted market after the risk has matured and adequate data has been generated.
It is therefore not surprising that a developing non-standard risk such as cannabis product liability would be embraced by surplus lines carriers and largely shunned as an admitted product. There is a small handful of admitted cannabis insurance products in several states, but they constitute a fraction of the total cannabis insurance industry. Several states certainly have sought to entice the admitted insurance market to underwrite cannabis risks more aggressively, most notably efforts by former California Insurance Commissioner Dave Jones and ongoing work by the National Association of Insurance Commissioners’ Cannabis Working Group. Those efforts, however, have yielded only nominal results in terms of new admitted insurance companies and capacity.
The decision by Michigan to exclude the surplus insurance market from underwriting risky product liability coverage for adulterated cannabis products is difficult to explain. Far from achieving the desired goal of ensuring that Michigan consumers and patients have access to a remedy through effective product liability insurance, the bill effectively prevents the Michigan cannabis industry from working with the most knowledgeable underwriters and brokers who have assisted cannabis companies throughout the country with this unique area of risk management.
Unreasonable Barriers to Insurers
Just as intriguing is Michigan’s decision to erect seemingly unreasonable barriers to insurers that may otherwise agree to offer product liability coverage in the state. Under SB 461, compliant insurance policies may not include any policy term “that relieves the insurer from liability for the payment of any claim for which the insured may be held liable under the act,” as well as mandatory coverage for even the intentional conduct of the licensee. It is difficult even for insurance coverage attorneys and other policy specialists to understand the meaning of this extremely broad statutory requirement. In fact, the language is so broad that it potentially precludes any otherwise effective policy warranty, exclusion or limitation that may be triggered in response to a product adulteration claim.
This overly broad and ambiguous language should rightly make any insurance company nervous and reluctant to provide cannabis product liability coverage to Michigan cannabis companies. Cannabis product liability insurance claims may be declined or limited under various loss scenarios for a wide variety of reasons based on commonly used policy requirements, exclusions and warranties. Removing the ability of insurance companies to moderate the risk around liability for adulterated cannabis products is simply unrealistic and unwise. Unless the law changes, Michigan licensees will likely be left with fewer insurance choices, higher premiums and, ironically, less-effective coverage.
Michigan Cannabis Licenses Are at Risk
There is no such thing as a “bulletproof” insurance policy that provides coverage for a class of claims under all circumstances. It is inevitable that there will be claims of adulterated cannabis products that are limited or declined by insurance companies in Michigan based on the specifics of particular loss scenarios. A cannabis license may be suspended, however, if the licensee fails to maintain insurance without provisions that “relieve the insurer from liability for the payment” of an adulteration claim. This appears to present an unreasonable risk to the cannabis license.
We will not be surprised to see license suspensions in Michigan if these insurance requirements are enforced by the MRA. The ability to change carriers also is made more difficult in an already challenging insurance market due to the requirement of providing 30 days’ written notice to the MRA prior to canceling the mandatory insurance. Delays that inevitably arise at policy renewal time will put Michigan licenses at further risk of suspension.
Cannabis Licensees Are Forced to Become “Insurance Specialists”
Though the law has the commendable goal of helping licensees obtain insurance to cover claims of harm allegedly caused by an adulterated cannabis product, it places an unreasonable burden on cannabis licensees and effectively requires them to be specialists in insurance. If the purpose of the law is to ensure that certain claims against cannabis licensees are covered and not barred by exclusions in insurance policies, a better approach might be for the state’s Department of Insurance to prohibit insurers from including the troublesome exclusions in their policies, rather than legislating onerous insurance requirements that result in the threat of license suspension for out-of-compliance policies. The state already has taken the unusual step of allowing only licensed insurance companies to write this coverage, which causes its own set of problems, as discussed above.
Perhaps the best approach is for open communication by the state authorities with both the admitted and surplus insurance markets to identify a solution that accomplishes the goal of ensuring adequate coverage for adulteration claims while protecting licenses and allowing access to best-in-class cannabis insurance.
The Cannabis Insurance Industry Is Ready to Talk
If these scenarios do come to pass, they largely will be the result of Michigan legislators and the MRA not effectively engaging and communicating with the cannabis insurance industry. Legislating insurance requirements in a highly regulated and evolving industry characterized by unknown risks should only happen when all stakeholders have been heard. The insurance industry is indeed ready and willing to engage with regulators if given the chance. This should be a learning opportunity for other states that may consider enacting similar mandatory insurance requirements for cannabis businesses.
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