Canadian Underwriter

The Straight Dope

December 8, 2016   by Emily Atkins, Editor

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With so many aliases, it’s no wonder the legal issues around the Cannabis sativa plant and its many uses are complex.

Used for centuries, and long the subject of silly jokes, the psychoactive plant and its extracts are now a serious business that is attracting much attention as the Canadian government inches towards legalization. With legalization comes opportunity for underwriters and eventually-once the claims start rolling in-adjusters.

Where there’s smoke

Prohibited since the 1920s in Canada, marijuana is listed as a controlled substance, making possession, production and trafficking of the plant illegal.

Yet weed is the most popular recreational drug used in Canada after alcohol. Eleven percent of Canadians over the age of 15 reported using grass in 2013. It’s the younger demographic who are most keen on herb, with 25 percent of those between 14 and 24 years reporting use, versus eight percent of those over 25. All this use is netting organized crime about $7 billion a year in Canada alone.


Not even considering the amount expended on chasing down the gangs, law enforcement is allocating vast resources pursuing individuals for possession, with marijuana charges accounting for more than half the police-reported drug offences in 2014.

So it’s little wonder the government has decided to take action. In 2015 the Trudeau government’s speech from the throne promised to legalize, regulate and restrict access to marijuana.

The government hopes to reduce crime, protect public health, establish a production, distribution and sales system and collect taxes, as well as continuing to provide a medical marijuana program for individuals with a prescription for its use. At present the marijuana industry in Canada is estimated to be worth between $80 and $100 million.

It’s legal now

Canadians can now get prescriptions for the medical use of marijuana. [See sidebar for an examination of the arguments for and against its medical use.] Medical use was made possible the 1990s, when an Ontario court decision determined the constitutional right to a reasonable amount of the drug for personal medical use.

At that time the model used by the government to manage medical marijuana allowed home production and personal medical use. This expanded to about 40,000 home growers by 2014, with an average of 90 plants each.

But this model caused significant problems, including increased risk of fire, theft, and mold and water damage to properties being used as grow houses. Health Canada could not keep up with the inspections needed to ensure safety, and there was increasing concern about illegal sales.

So the feds changed the model, adopting the Marihuana for Medical Purposes Regulations (MMPR) that allowed Licensed Producers (LPs) to grow and sell medical marijuana under strict conditions imposed by Health Canada. As of August this year there were 35 LPs across the country.

Thanks to a successful court challenge, Allard v. Canada-which claimed the LPs’ product was too expensive-in August 2016 the federal government again allowed medical marijuana users to grow their own at home in limited quantities. The MMPR was repealed and replaced with new Access to Cannabis for Medical Purposes Regulations (ACMPR).

The ACMPR allow for reasonable access to cannabis for medical purposes for Canadians who have been authorized to use the plant and its extracts by their health care practitioner.

Where previously there were up to 40,000 home growers in the country, now that number is poised to blossom, with many of the country’s more than 700,000 medical users likely to take advantage of the opportunity to save money by growing their dope themselves, says Eric Nash, a Victoria, BC-based marijuana consultant and current expert advisor to the federal Marijuana Legalization and Regulation Task Force roundtable.

The risks

Even when legalized, the production and distribution of marijuana for medical purposes is a risky business. And on the usage side, significant questions and challenges arise in the areas of liability, auto insurance, life insurance, health benefits, and the list continues.

But property risk is one of the biggest concerns for insurers where marijuana is concerned. For the home grower, the risks can be considerable.

Fire is said to be 24 percent more likely in a grow house thanks to requirements for high-intensity lighting, specialized ventilation and the addition of carbon dioxide to speed the plants’ growth.

Mold is another risk, caused by the moisture required to grow plants indoors. And the water itself can cause damage, especially if indoor irrigation systems fail.

Theft is a huge risk, says Nash. With a product that is worth between $1,800 and $3,000 per pound, and in quantities up to 27 pounds in stock, private growers become a lucrative target for thieves.

“Insurance is very important,” Nash adds.

Typically, individual growers are able to get coverage as part of their home policy, he notes.

Steve Wallace, a partner with law firm Dolden Wallace Folick, LP in Vancouver points out that the massive growth in the number of new growers could result in an explosion of claims. “It’s an increase in risk to property insurers across the country,” he says. “It’s a new form of risk that I don’t think property insurers are ready to accept yet.”

Wallace says there are all sorts of thorny legal issues being raised, particularly when it comes to rental units being used for grow ops. Under the new regulations tenants do not have to notify their landlords that they are growing marijuana with Health Canada’s permission.

“All these owners of rental properties have no idea that this is going on around them and Health Canada doesn’t have to tell them. So that’s frustrating, I would think, for property insurers having to deal with that,” Wallace says.

According to Wallace, there has already been a case in BC in which a homeowner was denied coverage for fire damage under a grow-op exclusion in her policy for a property she rented out, and she is suing Health Canada alleging the grow-op was not properly vetted and should not have been allowed due to its proximity to a daycare.

The perfect risk

It’s a different world for the 35 Licensed Producers.

“It’s the perfect risk,” says Daniel Mason, Senior Business Developer, Specialty Risks, with Burns & Wilcox Canada. “It’s highly regulated, there’s an exceptional amount of security, and construction is state of the art. All of the characteristics we look for in a perfect risk.”

Many factors, such as physical capacity (size of building, physical security considerations, number of staff, cultivation technique), sales capacity, and inventory levels are considered before Health Canada will issue a license.

“From an underwriting perspective Health Canada has already done the work for us,” Mason says.

His company offers a comprehensive Medical Marijuana Program for federally licensed medical marijuana manufacturing and distribution operations. It covers companies from seedling to stock, from vacant production facilities to fully operational facilities filled with plants, and the finished product.

Mason says that in the year since they started offering the product, Burns & Wilcox has captured about 40 percent of the LP market. Another company offering a similar product is CHES Special Risk Inc, which includes liability, theft or damage to product or equipment.

Mason says Burns & Wilcox is in it for the long haul. Companies have been coming and going from the market as regulations evolve, he says.

“It’s a volatile market, and for a client it would drive you crazy not knowing if you’re going to get renewal terms next year. There’s a lot of money invested in these facilities, so there’s a lot of exposure. Our model is not to get in and get out; it’s to be a partner.”

So far the business is paying off. They’ve had only one minor claim in the first year.


While the licensed growers may be seen as the perfect risk, there are gaps in what’s available for individuals. Personal growers are facing tightening of grow-op exclusions, to the point where insurers are removing any reference to causation in their policies. Wallace says the courts have accepted language that simply says the insurer won’t underwrite any house that has a grow op.

Another gap is in liability coverage. Mason notes that standard markets won’t write policies for personal growers. Auxiliary commercial markets are writing policies on a commercial form and “doing the clients a massive disservice”, he says.

Instead of getting personal liability, they are getting premises liability on a commercial form. “That’s fine if someone slips and falls on your property, but if you’re out walking your dog and it bites somebody, there’s no coverage, while that would have been covered under a personal form.”

Mason also notes that product liability is only being made available by his company on a claims-made form. Without proper scientific evidence of the long-term health impacts, “we don’t want anything to do with it,” he says.

“It really reeks of what happened to tobacco in the 70s and 80s, when people started looking into the science, what the carcinogens in the product were doing to the human body. It wasn’t until then that we started seeing the class action lawsuits.”


With use of the product widely permitted now for medical purposes, and further legalization pending in the next year, additional insurance issues are arising. From automobile policies, to life insurance and workplace drug policies, the legal use of a psychotropic drug brings thorny questions to the fore.

Some Canadian life insurers have already declared that tokers are not smokers for the purposes of their policy.

Questions about legal limits and workplace drug testing will no doubt take centre stage at conferences and in boardrooms as governments and insurers alike wrestle with the implications.

What adjusters need to know

Clearly, with the continuing use of the grow-at-home medical marijuana model combined with the licensed grower-distributors, there will be some commonalities with previous policies and the claims arising from them. It’s not a completely new game.

As Mason points out, one of his main advisors in underwriting the LP businesses is a lawyer who specializes in property claims related to grow ops.

But with the additional of personal, recreational use coming with the Liberal’s legalization legislation, there will be a lot of changes in the pipe for the insurance industry.

If the government is going to allow every adult in Canada to grow five to ten plants for personal use in their homes, that’s quite big from an insurance perspective, Nash asserts.

“It’s a huge niche industry in terms of the opportunity,” for adjusters he says.

“Get in on the ground floor, it’s a growing business, a big business,” Mason advises. There is a lot of discussion going on throughout the country, and it should be easy to join the conversation and soak it all in, he says.

“It’s pretty exciting, actually. It’s a bit like the gold rush.”

And when the claims start rolling in, Wallace suggests adjusters learn the regulations-fast. “The first thing the adjuster should do is really check the licenses closely, especially with the new legislation.” He notes that rules are strict about the locations-not too close to schools or daycares-and the number of allowed plants, and so on.

Nash points out that adjusters will need to learn to asses the monetary value of lost product and live plants and equipment in claims where the insureds were growing their own.

Issues to be ironed out

Getting the legalization legislation passed and implemented is not going to be a “quick slam-dunk” for the Trudeau government, Nash says.

The legislation is scheduled for introduction in 2017, but he figures it won’t pass before 2018.

There are many issues to be sorted out, from dealing with international treaties that require Canada to criminalize the production, sale and possession of cannabis for non-medical use, to the parameters of allowable use, to the distribution system. The latter question requires the involvement of all the provinces and territories, as each must implement its own system.

There are also dozens of interested stakeholder groups the government must listen to before it moves forward. To that end the federal Task Force on Marijuana Legalization and Regulation is scheduled to report in November, and its recommendations will form the basis for government action going forward.

As the government plants the seeds of this leafy legislation, now is a great time for adjusters to cultivate their knowledge of Cannabis in Canada. Get the straight dope on doob, and get ready for reefer madness.

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