The Ups and Downs of Insuring Tribal Cannabis

There are numerous hurdles that cannabis businesses must get over to get properly insured – price, availability, exclusions, marijuana being federally illegal – but those hurdles may be multiplied for Tribal cannabis operations.

Numerous tribes across the nation are participating on some level in the green rush, in which businesses and capital in newly legal states is flowing into the industry. In California, for example, the nation’s largest cannabis market, a 2019 report shows 35 out of the 109 federally recognized tribes in the state were operating enterprises in the legal cannabis industry or developing plans for economic development in the cannabis industry. Nationally, 90 tribes out of 573 federally recognized tribes were developing or engaged in legal cannabis and hemp commerce. That’s according to a report from the California Native American Cannabis Association.

That same report calls out some regulatory barriers — specifically regulations that treat tribal nations as business entities rather than sovereign governments.

Bottom-line is that there’s interest from tribes in cannabis, and a heck of a lot of room for growth.

One such operation is the Santa Ysabel Botanical Facility, a cannabis campus located on roughly 30 acres in the mountains around San Diego County. The operation includes three cultivators, a large-scale greenhouse, four micro-businesses, and a dispensary doing more than $1 million in annual sales. The operation employs 20-plus workers.

Finding affordable insurance has been challenging, and costly, for Santa Ysabel.

John Balian, a vice president with Wood Gutmann & Bogart Insurance Brokers and director of the firm’s cannabis industry practice, estimates operations like Santa Ysabel can pay as much as 50% more on policies than similar cannabis operations.

Lack of Carriers

One of the big issues is the lack of carriers willing to offer insurance to cannabis businesses, and fewer seem to be showing an interest in Tribal cannabis.

“There’s definitely…a small community of carriers that will write cannabis risks in general,” Balian said. “I think you can probably take that in half for, for tribal cannabis.

One of the big insurers that dominates the market is Tribal Frist, a specialized program of Alliant Underwriting Solutions. Tribal first is considered the largest provider of insurance solutions to Native America.

“They write probably 95% of all the tribes and 90% of all the tribal enterprises throughout the United States,” Balian said. “They will offer some coverage to tribal cannabis operations, but it’s fairly limited. So, what we normally try to do is start with Tribal First, have them write what they’re comfortable with and then back fill in through the surplus lines markets, those cannabis exposures that Tribal First will not.”

One explanation of why it’s so difficult to find affordable insurance for operations like Santa Ysabel, is Tribal Sovereignty, which refers to the right of American Indians and Alaska Natives to govern themselves, giving them, with a few exceptions, the same powers as federal and state governments to regulate internal affairs.

“So, the concern that a lot of insurers have is that the tribes will raise Tribal sovereignty as a defense in a claims dispute, in a premium audit dispute, any kind of collections dispute,” Balian said. “So, the insurers that are thinking about ensuring a Tribal risk, normally wants the tribe to waive their sovereignty and tribes are very, very reticent to do that. They see that as a slippery slope to waive that sovereignty. There have been times that I’ve seen where if a tribe absolutely needed to get an insurance policy done, or a premium finance contract done that they would waive their sovereignty, but it has to be very narrowly defined and it’s absolutely something they don’t want to do.”

To find insurance for his Tribal cannabis clients, Balian typically starts with Tribal First and goes from there.

“I’ve been a big fan of Tribal First for over 20 years,” he said. “I think they’re an absolutely fantastic company. Their policy forms are the best around. They’re very easy to work with. They have superior claims and loss control services, and their underwriters are very knowledgeable. I start with Tribal First, if I can find a 100% tribal risk and try to get them to put up terms or consider it up to their comfort level. So that requires a knowledge of Tribal First and a good relationship with them.”

Surplus Lines

To fill the gaps, he often then goes to the surplus line markets.

With San Ysabel, a big problem, beside lack of available insurance, is that the operation is located in a high brush fire area.

The operation’s property policy is a big pain point that’s only gotten worse in the last few years as insurers have begun pulling back from writing policies for properties in California’s wildfire prone areas.

“The premium for it was say a $100,000 two years ago,” Balian said. “And for that, they were getting, I think, $10 million or $11 million worth of coverage because of the hardening of the property marketplace in general and the location of where they are… Even though they have a great fire department and so forth, because they’re in a high brush area, that same $100,000 only bought them two and a half-million dollars of coverage, which was what, 25% of what they had coverage the year before.”

The first word that came to the mind of James Bucaro, general manager at Santa Ysabel, when he was asked about the operation’s insurance situation was “high,” and then he offered an analogy.

“Obviously, when someone buys a car, they think about the car payment and they think less about the insurance payment, but sometimes the insurance payment is just as much as the car payment,” Bucaro said. “And so, it’s all high. I can tell you what stands out for me usually is going to be the liability, the general liability. And then, with our dispensary, having the product liability to make sure that the product we’re selling, if someone gets sick, that we’re covered under that as well. So those two things stand out to me when I think about the ancillary cost of what it all adds up to.”

Despite the insurance hurdles, Bucaro believes they’re building something worth watching.

“The market is small, but I think tribes are starting to see that cannabis might be the next wave of Tribal revenues, the next economic driver – a lot like what casino was numerous years back,” Bucaro said. “And so, now we’re starting to see some tribes really pop up into the industry.”