US and Canadian Cannabis Risks

Cannabis Risks

Currently, cannabis is listed as a Schedule 1 drug under US federal Controlled Substances Act, which means that it is not legal for sale. In addition, cash generated from the sale of cannabis may implicate federal Anti-Money Laundering laws. Nevertheless, a number of states have passed laws that permit the sale of cannabis for medicinal purposes and additionally a smaller number allow its sale for recreational purposes.

Based upon a thorough review of all positions, unless and until the sale of either medicinal or recreational cannabis is formally recognized by the Federal government as legal (as opposed to subject to non-enforcement directives), underwriters should not insure such operations in any form (including crop, property, or liability cover for those who grow, distribute or sell any form of cannabis or cover for the provision of banking or related services to these operations) in the United States.

Coverage may be provided to non-cannabis-related businesses with incidental cannabis exposures (e.g. a pharmacy or physician where a small amount of their business may include cannabis products or prescriptions) although, losses arising from such exposures should, where possible, be excluded from cover.

Lloyd’s will continue to monitor developments under US law and will reconsider this position if and when the conflict of laws is resolved.

Hemp Risks

The Agricultural Improvement Act of 2018 (the ‘Act’) – popularly known as the ‘Farm Bill’ – among other matters legalises industrial hemp. The Act reclassifies hemp to distinguish it from cannabis, affirms the legitimacy of hemp research, and establishes a framework for state and federal regulation of hemp production.

Section 10113 of the Act amends section 297A of the US Agricultural Marketing Act of 1946 to define ‘hemp’ as:

“the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

Section 12619 of the Act amends the US Controlled Substances Act (CSA) to exclude hemp – as defined above under the Agricultural Marketing Act – from the definition of cannabis. In addition, the section excludes tetrahydrocannabinols (THC) found in hemp from the listing of THC in Schedule I of the CSA.

Hemp is legal within the US and may be underwritten at Lloyd’s. Syndicates underwriting US hemp related risks should be mindful, however, that the Act’s relaxation of federal law does not equate to a complete deregulation of hemp. Further, some states’ laws may be more restrictive than the federal CSA. Underwriters should therefore take steps to remain informed of the development of regulations in this area and ensure that any risks written conform to state and federal laws - this would include verifying that any applicable state or federal regulatory approvals have been acquired.

^{Performance Management – Supplemental Requirements and Guidance, pages 36-37}

The Canadian Cannabis Act makes it legal in Canada to produce, distribute, sell and possess cannabis, subject to compliance with the provisions of that Act. Lloyd’s is satisfied that, if properly done, Lloyd’s underwriters are well positioned to write Canadian cannabis business subject to compliance with local Canadian requirements.

However, as cannabis remains a Class B drug in the UK, Lloyd’s has considered whether Part 7 of the Proceeds of Crime Act 2002 (POCA) is engaged by underwriters providing insurance cover in Canada. In particular, it is recognised by Lloyd’s that by reason of a combination of section 328(3), 329(2) and 340 POCA, sections 4, 6, and 37 Misuse of Drugs Act 1971, the production etc. of cannabis in Canada could be said to be “proscribed conduct” under POCA. This raises the question whether providing cannabis related insurance could result in an offence under section 328 POCA, notwithstanding that the underlying risks have been legalised in Canada.

Having taken advice from specialist Leading and Junior Counsel, Lloyd’s is satisfied that:

• Providing insurance for Canadian cannabis risks would not amount, in the circumstances under consideration, to entering into, or becoming concerned in, an arrangement which facilitates the acquisition, retention, use or control of criminal property by another person thereby breaching section 328 POCA.
• That neither POCA – nor any of its statutory predecessors – was designed to bring wholly lawful conduct such as the provision of insurance of business activity carefully legalised in another country, into its scope.
• This view is consistent with the Explanatory Notes to POCA, including for example paragraph 6 which states that the statute’s purpose was to criminalise money laundering in its broadest form which “is the process by which the proceeds of crime are converted into assets which appear to have a legitimate origin so that they can be retained permanently or recycled into further criminal enterprises” – this is far removed from Lloyd’s underwriters openly and properly providing businesses in Canada with insurance against a conventionally covered ascertainable external event.

Lloyd’s will therefore consider the writing of Canadian cannabis business by syndicates at Lloyd’s as part of the usual business planning process. Managing agents will, however, be required to demonstrate an appropriate understanding of the Canadian Cannabis Act to ensure compliance with all local laws. Where necessary, and should there be any question as to the legality of accepting any particular risk, either under UK or Canadian laws, managing agents will be required to obtain appropriate legal advice.

Particularly in view of the proximity of the USA to Canada and the potential to write cross-border exposures, it is important that managing agents ensure that any cannabis risks have Canadian risk location only.

^{Performance Management – Supplemental Requirements and Guidance, pages 37-38}