It’s baaaack! As expected with the new Congressional makeup, the Secure and Fair Enforcement (SAFE) Banking Act was reintroduced last month, designed to allow banks to deal directly with plant-touching cannabis businesses and their many suppliers. Although the bill has received bipartisan endorsement along with backing from the American Bankers Association and Credit Union National Association, it has never made it to a vote on the Senate floor even though it has been passed by the House three times.
Under the Senate Democratic majority, the prospects for passage now appear likely. Depository institutions would now be a be able to provide services to cannabis-related businesses, including loans and deposit accounts, free from federal action by regulators. What is equally important for the industry, however, is its allied legislation that is scheduled to pass alongside the SAFE Act: the Clarifying Law Around Insurance of Marijuana (CLAIM) Act.
The CLAIM Act completes establishing a safe harbor for the cannabis industry, allowing insurance companies and ancillary businesses to also engage with plant-touching cannabis businesses. This act is expected to bring more competition into the insurance marketplace and provide greater capacity, which of course should help lower premiums. It will also accelerate industry availability of specialty policies, and revitalize the weak market for cannabis reinsurance. In addition, it will provide protection for such industry suppliers as landlords and legal, accounting, technology and design firms, assuring they will not lose their insurance or be downgraded because they do business with cannabis companies.
An important part of the CLAIM Act is its provision that the Government Accountability Office (GAO) must report on “barriers to marketplace entry, including in the licensing process, and the access to financial services for potential and existing minority-owned and women-owned cannabis-related legitimate businesses.”
Some of the specific benefits the insurance industry is looking forward to with passage of the CLAIM Act include:
Greater availability of D&O insurance. Many carriers have been unable to underwrite management liability policies, and as such management exposure has been a major problem in attracting talent. Prospective candidates for director and officer-grade positions are often unwilling to accept if they cannot receive the insurance coverage they expect. And because cannabis companies are forced to obtain financing through non-traditional means, it can be challenging to satisfactorily disclose all the risks involved to top management.
Fewer claims from operating a cash business. With cannabis businesses able to participate in the banking system, the all-too-common claims of cash theft will sharply drop. In addition, business disputes between the businesses and their suppliers or employees based on the difficulty of tracking cash payments will now be preventable.
Less product-related claims. Cannabis businesses have generally been off-limits to the major food safety laboratories and quality assurance firms. The new legislation will allow cannabis businesses to begin working with the big players, helping reduce product recalls and lawsuits.
A green light for captives. Right now, it is difficult to form a cannabis captive because the only state to currently domicile these businesses is Nevada — where there are two very small startup efforts. This has led to cannabis companies looking at offshore domiciles; a solution to be sure, but not always the preferred one. Passage of the Act, along with increased availability of reinsurance, should ease state regulators’ minds.