Understanding Terrorism Risk Insurance Act (TRIA) for Cannabis Businesses

When cannabis businesses think about risk, terrorism insurance might not be the first thing that comes to mind. Yet, as the cannabis industry grows and gains mainstream acceptance, understanding how the Terrorism Risk Insurance Act (TRIA) applies is becoming increasingly important. This federal program plays a critical role in protecting businesses from losses related to terrorist acts, but navigating its implications alongside the unique challenges of cannabis insurance requires careful attention.

With 38 states now having legal cannabis programs-19 for recreational use and 38 for medical-this sector is no longer niche but a significant commercial enterprise. Yet, many cannabis operators still struggle with insurance coverage gaps, including terrorism risk policies that are often complex and costly. This article breaks down what TRIA means for cannabis businesses and why it matters for their insurance strategy. For a detailed look at cannabis insurance challenges, see the Milliman report on insuring cannabis businesses.

What Is the Terrorism Risk Insurance Act (TRIA)?

TRIA was enacted in 2002 after the September 11 attacks to stabilize the insurance market by ensuring that terrorism-related losses would be covered. It acts as a federal backstop, sharing the financial burden of terrorism claims between the government and insurers. The program has been extended multiple times, with the most recent reauthorization increasing the mandatory recoupment amount from $27.5 billion to $37.5 billion, reflecting the growing scale of potential claims according to the National Association of Realtors.

Simply put, TRIA requires insurers to offer terrorism coverage for eligible lines of insurance, but only after a certain threshold of losses is met. This means that businesses can purchase terrorism risk insurance with some assurance that the government will help cover catastrophic losses. However, the program primarily targets traditional industries and large-scale commercial risks, which can complicate matters for emerging sectors like cannabis. As the landscape of threats evolves, so too does the need for comprehensive coverage that addresses the unique risks faced by various industries, including those that are still navigating regulatory uncertainties.

How TRIA Coverage Works

Under TRIA, insurers must offer terrorism coverage as part of their commercial property and casualty policies. If a certified act of terrorism occurs, insurers pay claims up to a deductible, after which the federal government reimburses a significant portion of the losses. For 2017, the total premium paid for terrorism coverage was about $3.65 billion, representing 1.75% of the $209.15 billion in total premiums for TRIA-eligible insurance lines according to a 2018 Treasury report.

This federal support helps keep terrorism insurance affordable and available. But cannabis businesses face unique hurdles when it comes to qualifying for these policies, given the patchwork of state laws and federal restrictions that still classify cannabis as a controlled substance. The complexities of navigating these regulations can deter insurers from providing coverage, leading to a significant gap in protection for businesses operating in this burgeoning industry. As the cannabis market continues to expand, the demand for tailored risk management solutions that align with TRIA's framework may prompt discussions among policymakers about how to adapt the program to include these emerging sectors.

Moreover, the implications of TRIA extend beyond just the insurance market; they also play a crucial role in the broader economic landscape. By providing a safety net for businesses, TRIA fosters an environment where companies can invest and grow without the paralyzing fear of catastrophic financial loss due to terrorism. This stability is particularly important in sectors that are vital to national security and public safety, as it encourages innovation and resilience in the face of potential threats. As we look to the future, the ongoing evolution of TRIA will likely reflect the changing dynamics of risk and the need for comprehensive coverage that addresses both traditional and emerging threats.

Why Cannabis Businesses Face Insurance Challenges

The cannabis industry has rapidly evolved from a fringe market to a mainstream sector with expanding legal acceptance. Despite this progress, insurance remains a complicated issue. About 75% of cannabis industry respondents report feeling underinsured, caught between high premiums and insufficient coverage according to TruePath Insurance.

Traditional insurers often hesitate to offer comprehensive policies to cannabis businesses because of federal legal risks and regulatory uncertainties. This hesitancy extends to terrorism risk insurance, which is typically bundled with other commercial coverages. Cannabis businesses may find it difficult to secure terrorism coverage or face prohibitive costs when they do.

Intersection of Cannabis and Property/Casualty Insurance

The National Association of Mutual Insurance Companies (NAMIC) has highlighted the complex relationship between cannabis operations and property/casualty insurance. Their analysis points out that cannabis businesses require tailored insurance solutions that address their unique risks, including property damage, liability, and crime, but also terrorism risk as detailed in their industry report.

Because cannabis businesses often operate in cash-heavy environments with high-value inventory and property, they can be attractive targets for criminal activity, including terrorism-related threats. This makes terrorism risk insurance not just a regulatory formality but a practical necessity for many operators. Moreover, the evolving landscape of cannabis legalization has led to a patchwork of state laws, further complicating the insurance landscape. Insurers must navigate varying regulations, which can lead to inconsistent coverage options across different jurisdictions.

Additionally, the stigma surrounding cannabis use still lingers in some circles, which can affect how insurers perceive risk. Many insurance providers may lack the experience or data needed to accurately assess the risks associated with cannabis businesses, leading to conservative underwriting practices. This can result in higher premiums or limited coverage options that do not adequately protect operators from potential losses. As the industry matures, however, there is hope that increased data sharing and collaboration between cannabis businesses and insurers will lead to more comprehensive and affordable insurance solutions tailored to this unique market.

How TRIA Impacts Cannabis Business Insurance

Understanding TRIA’s role in cannabis insurance requires recognizing the program’s federal nature versus the state-specific legal landscape of cannabis. While TRIA provides a federal backstop for terrorism losses, cannabis businesses must first secure eligible commercial insurance policies that include terrorism coverage. This is often the biggest hurdle.

Because cannabis remains federally illegal, many insurers exclude cannabis-related risks from their standard policies. Without an eligible underlying policy, TRIA coverage cannot be triggered. This leaves cannabis businesses vulnerable to terrorism-related losses without the safety net TRIA offers to other industries.

Potential Benefits of TRIA for Cannabis Businesses

For cannabis businesses that do manage to secure terrorism risk insurance, TRIA offers significant financial protection. In the event of a certified terrorist act causing damage or loss, the federal government’s involvement helps insurers manage their exposure, which in turn can help keep premiums more stable.

This protection is crucial for cannabis operators who face high risks due to the nature of their products and operations. It also signals a maturing insurance market that is beginning to accommodate the cannabis sector’s needs, even if progress is slow.

Moreover, the inclusion of TRIA in cannabis insurance discussions highlights the evolving perception of the cannabis industry within the broader economic landscape. As more states legalize cannabis for medical and recreational use, the potential for growth in this sector becomes increasingly evident. Insurers are beginning to recognize that cannabis businesses are not just niche markets but integral parts of the economy that require comprehensive risk management solutions. This shift could lead to more innovative insurance products tailored specifically for the unique challenges faced by cannabis operators.

Furthermore, as the cannabis industry continues to grow, the demand for robust security measures and insurance products will likely increase. This could encourage more insurers to enter the market, potentially leading to more competitive pricing and better coverage options. The interplay between TRIA and cannabis insurance may also prompt legislative discussions about the need for clearer federal guidelines on cannabis, which could further enhance the industry’s stability and attractiveness to investors. As these dynamics unfold, cannabis businesses may find themselves in a better position to secure the necessary protections to thrive in an increasingly complex landscape.

What Cannabis Businesses Should Consider Regarding TRIA

Insurance buyers in the cannabis industry should approach terrorism risk insurance with a clear understanding of their coverage options and limitations. Here are key considerations:

• Verify Eligibility: Confirm that your commercial insurance policies include terrorism risk coverage and are TRIA-eligible.
• Understand Coverage Gaps: Many cannabis policies exclude certain risks or have sublimits that may not fully protect against terrorism-related losses.
• Evaluate Cost vs. Benefit: Terrorism insurance premiums can be expensive, especially for cannabis businesses. Assess whether the coverage aligns with your risk profile.
• Work with Specialized Brokers: Insurance brokers familiar with cannabis and TRIA can help navigate the complexities and find appropriate coverage.

Given the rapid growth and evolving legal landscape of cannabis, staying informed about insurance developments is essential. The industry's expansion from criminality to commercial enterprise has been remarkable, but insurance must catch up to provide adequate protection as Milliman notes.

Furthermore, cannabis businesses should also be aware of the specific risks associated with their operations. For instance, cultivation facilities may be particularly vulnerable to acts of vandalism or targeted attacks due to their high-value inventory. This necessitates a nuanced understanding of not just terrorism risk, but also the broader spectrum of security threats that could impact their operations. Engaging in comprehensive risk assessments can help identify these vulnerabilities and inform insurance decisions.

Additionally, as the cannabis market continues to mature, regulatory changes may influence the availability and terms of terrorism risk insurance. Businesses should keep abreast of legislative developments that could affect their insurance landscape, such as changes in federal or state laws regarding cannabis. This proactive approach not only aids in securing the right coverage but also positions businesses to adapt swiftly to an ever-evolving environment, ensuring they remain resilient against unforeseen risks.

Comparing Terrorism Risk Insurance for Cannabis vs. Traditional Businesses

Preparing for the Future of Cannabis Insurance and TRIA

The cannabis industry is poised for continued growth as more states legalize medical and recreational use. This expansion will likely drive insurers to develop more sophisticated products tailored to cannabis businesses, including terrorism risk insurance. Industry stakeholders, including insurers, regulators, and cannabis operators, must collaborate to bridge current coverage gaps and clarify eligibility under federal programs like TRIA.     

Keeping an eye on legislative changes is also critical. The Terrorism Risk Insurance Program Reauthorization Act was extended through 2020 with increased financial thresholds, but future reauthorizations could further impact coverage terms and availability as reported by the National Association of Realtors. Cannabis businesses that stay informed and proactive will be better positioned to manage their risks effectively..       

Frequently Asked Questions

Q: Is terrorism insurance mandatory for cannabis businesses?

A: No, terrorism insurance is not mandatory but is often recommended, especially for businesses with significant property or inventory at risk.

Q: Can cannabis businesses get TRIA coverage directly?

A: TRIA coverage is not purchased directly. It is a federal backstop that supports eligible commercial insurance policies that include terrorism coverage.

Q: Why is it harder for cannabis businesses to get terrorism insurance?

A: Federal illegality and regulatory uncertainty make insurers cautious, leading to exclusions or higher premiums for cannabis-related risks.

Q: How can cannabis businesses improve their chances of getting terrorism coverage?

A: Working with brokers who specialize in cannabis insurance and maintaining compliance with state laws can improve eligibility and coverage options.

Q: Does TRIA cover all types of terrorism risks?

A: TRIA covers certified acts of terrorism as defined by the federal government, but specific policy terms may vary, so businesses should review their coverage carefully.

Q: What should cannabis businesses do if they cannot get terrorism insurance?

A: They should assess alternative risk management strategies, such as enhanced security measures and self-insurance, while continuing to seek coverage as the market evolves.

What to Remember

Terrorism risk insurance under TRIA provides a vital safety net for many commercial enterprises, but cannabis businesses face unique challenges in accessing this protection. Understanding how TRIA works, recognizing the insurance market’s current limitations, and actively seeking specialized coverage can help cannabis operators safeguard their investments. As the industry continues to mature, so too will the insurance products designed to meet its needs.

Staying informed and working with knowledgeable insurance professionals is the best way to navigate this complex landscape and ensure your cannabis business is prepared for all types of risks, including those related to terrorism.