Legal U.S. Cannabis Sales Soar Past $31.8 Billion in 2023, With Projections Reaching $507 Billion by 2028, Driving Demand for Innovative Insurance Solutions
Legal annual cannabis sales in the United States surpassed $31.8 billion in 2023, according to research firm Brightfield Group, with projections indicating the market could reach $507 billion by 2028. This dramatic growth is fueled by a surge in both medical and recreational cannabis use. Currently, 38 states and the District of Columbia have legalized some form of medical marijuana, while recreational use is permitted in 19 states plus D.C.
Despite this state-level legalization, cannabis remains classified as a Schedule I substance under the federal Controlled Substances Act (CSA), which creates significant legal and operational challenges. The misalignment between state and federal laws, combined with rapidly evolving regulations and the ongoing standardization of business practices, has historically discouraged insurers from entering the market.
As a result, cannabis-related businesses (CRBs) often struggle to secure comprehensive, affordable insurance coverage that adequately addresses the unique risks of the industry.
Understanding Cannabis, Marijuana, and Hemp: Differentiating Products to Navigate Regulatory Complexities
The Cannabis sativa plant contains over 500 chemicals, including more than 100 cannabinoids. The most widely known cannabinoid is delta-9-tetrahydrocannabinol (THC), the primary psychoactive compound responsible for the “high” associated with marijuana use.
Marijuana generally refers to the dried flowers and leaves of the cannabis plant and is most commonly consumed through smoking. However, alternative methods include edibles, tinctures, and vaporization. In contrast, hemp is a genetically distinct variety of Cannabis sativa with 0.3 percent THC or less. While marijuana is primarily used for medicinal and recreational purposes, hemp serves mostly industrial purposes such as textiles, paper, and construction materials.
The distinction between hemp and marijuana is critical for legal, regulatory, and insurance purposes. While hemp is federally legal under the 2018 Farm Bill, marijuana continues to occupy a grey zone, complicating insurance underwriting.
Federal Cannabis Regulations: Schedule I Classification, Reclassification Efforts, and FDA Oversight
Under the CSA, cannabis is categorized as a Schedule I drug, meaning it has no “currently accepted medical use” and is illegal to possess or use under federal law. This classification has historically created a barrier to mainstream insurance coverage for CRBs.
In May 2024, President Joe Biden announced plans to reclassify marijuana from Schedule I to Schedule III under the CSA, pending final approval by the DEA. This shift could open new regulatory and financial opportunities for the cannabis industry. Meanwhile, hemp was explicitly removed from the Schedule I classification in the 2018 Farm Bill, making hemp-derived CBD legal at the federal level, although still subject to FDA approval under the Federal Food, Drug, and Cosmetic Act (FD&C Act).
Currently, the FDA has approved only limited CBD-based pharmaceuticals, such as Epidiolex for epilepsy treatment. Federal law continues to prohibit CBD in food or drink products, creating additional complications for CRBs seeking regulatory compliance.
Insurance Risks for Cannabis Businesses: Theft, Liability, and Compliance Challenges
Cannabis-related businesses face a broad array of risks similar to other agricultural or manufacturing enterprises, including workplace accidents, property damage, crop failure, and product liability. However, unique factors such as high-value inventory, cash-only operations due to banking restrictions, and the psychoactive nature of cannabis elevate these risks significantly.
Approximately 70 percent of CRBs operate without formal banking relationships, handling large sums of cash, which increases the likelihood of theft and creates additional liability exposure. The SAFE Banking Act, passed by the House in April 2023 and awaiting Senate approval, aims to improve banking access for cannabis businesses.
Another legislative effort, the Clarifying Law Around Insurance of Marijuana (CLAIM) Act, introduced in March 2021, would protect insurers providing coverage to cannabis businesses from federal prosecution. Both bills are critical to expanding insurance access and mitigating risk in the cannabis sector.
Product liability is another major concern. Edibles, beverages, and other infused products carry risks related to mislabeling, misrepresentation, or adverse effects on consumers. Standard general liability policies typically do not extend to these unique exposures, necessitating specialized cannabis insurance policies tailored to these risks.
The Challenges of Individual Cannabis Insurance: Workers Compensation, Auto Coverage, and Medical Restrictions
Individuals consuming cannabis also face insurance-related hurdles. Workers’ compensation claims may be denied due to cannabis use, and employment-related drug screening can impact eligibility for various insurance products. Auto insurance rates can increase because of perceived higher risks associated with driving under the influence of cannabis, compounded by inconsistent roadside detection methods.
Health insurance policies often include clauses that exclude coverage for conditions treated with cannabis, further complicating patient access to legal therapies.
How Cannabis Businesses Can Mitigate Risk: Understanding Specialized Insurance and Captive Solutions
Jason Horst, managing partner at Horst Legal Counsel, emphasizes that cannabis businesses share many operational risks with mainstream businesses but face elevated exposure due to federal illegality, high-value inventory, and novelty. “Underwriting those risks is different,” he notes, citing theft and product liability as major concerns.
Many CRBs have explored using Section 831(b) of the IRS Code to mitigate federal tax burdens created by Section 280E, which disallows standard deductions for controlled substance-related businesses. While captives and risk retention groups offer potential tax and risk management benefits, Horst warns that many solutions are superficial without proper risk transfer mechanisms in place.
The cannabis insurance market has matured in recent years. New Dawn Risk reported in 2021 that about 30 U.S. insurers now offer cannabis-specific coverage, up from only six in 2020. However, most policies require cash payments and offer coverage limits ($1 million per occurrence/$2 million aggregate) below what many CRBs need, with restrictive endorsements and protective warranties often complicating claims.
The Role of Captives in Cannabis Insurance: Proactively Managing Enterprise Risk
Captive insurance solutions are becoming an increasingly popular option for CRBs. TJ Frost, president of Symphony Grow, explains that captives allow companies to proactively manage risks while potentially obtaining tax benefits. Options include single-parent captives, group captives, and segregated cell captives, each with unique structures and appetites for risk.
Captives are particularly valuable for businesses with complex or high-risk exposures, offering more control over coverage terms, claims handling, and overall enterprise risk management.
Federal Legislation, Regulatory Guidance, and Industry Standardization
The National Association of Insurance Commissioners (NAIC) established a Cannabis Insurance Working Group in 2018 to study coverage gaps and regulatory issues in the cannabis industry. The group has produced white papers and guidance, including the 2019 “Understanding the Market for Cannabis Insurance” and a 2023 update, addressing recent federal legislative actions, state regulations, and emerging insurance needs.
Key areas of focus include minor cannabinoids, on-site consumption lounges, and compliance frameworks for emerging markets. The NAIC has also advocated for the SAFE Banking Act and CLAIM Act to expand insurance access and clarify federal risk management guidance for CRBs.
As the cannabis industry continues to grow rapidly, insurance solutions must evolve to meet the unique legal, operational, and product-related risks facing these businesses. Proper enterprise risk management, specialized policy language, and innovative captive solutions will be crucial in ensuring the sustainability and resilience of the U.S. cannabis market.
Addressing Legal, Financial, and Operational Risks in a Rapidly Growing Market
The U.S. cannabis industry represents one of the fastest-growing sectors in the economy, yet federal illegality, regulatory uncertainty, and high-risk exposures create significant barriers to adequate insurance coverage. From product liability and property theft to employee safety and banking restrictions, CRBs face a complex web of challenges that demand specialized solutions.
As the industry matures, both insurers and businesses are adapting, leveraging captives, legislative advocacy, and customized risk management strategies to navigate an evolving landscape. Continued federal clarity, standardized practices, and innovative insurance structures will be essential for sustaining growth and protecting stakeholders across the legal cannabis supply chain.
