Two recent but consequential federal moves are set to reshape the risk profile of the US cannabis industry.

First, an executive order signed by Donald Trump in late 2025 directs federal agencies to advance the long-debated rescheduling of cannabis from a Schedule I to a Schedule III substance.

Second, Congress enacted changes to the federal definition of legal hemp, tightening controls on intoxicating hemp-derived products that emerged after the 2018 farm bill.

Taken together, these developments create an uneven outlook: marijuana operators may see incremental gains in financial stability and insurability, while hemp producers face fresh regulatory and liability headwinds.

According to Frank Costa (pictured), principal and national growth leader at World Insurance Associates LLC, the rescheduling effort is a meaningful step forward, even if it stops short of full federal legalization.

“I see the rescheduling as a step forward, but it’s definitely incomplete. I think that the time will come when the cannabis industry will be completely legalized, which means that they can act and feel and operate like every other legitimate business,” Costa said.

“When that happens, that will be the precursor to insurance carriers finally accepting the industry as a standard or premier type of business.”

Rescheduling cannabis – what are the effects on the industry?

If cannabis is ultimately reclassified as Schedule III, one of the most immediate effects will be that cannabis businesses would no longer be subject to IRS Section 280E, which currently prevents companies that sell Schedule I substances from deducting ordinary business expenses.

That changes cash flow dramatically, according to Costa. “These businesses become more viable, more stable, and more legitimate from a carrier’s perspective,” he said.

Stronger financials reduce concerns around operational fragility, loss volatility, and long-term survivability. These issues have historically pushed cannabis risks into surplus lines or highly restricted programs.

Costa said the legitimacy effect extends across the supply chain: “Whether you’re talking about growers, distributors, or retail operations, this moves the entire client base one step closer to being viewed like a traditional industry.”

That shift matters for brokers, many of whom have struggled to place comprehensive coverage for cannabis clients at sustainable pricing. While workers’ compensation and commercial auto have become more accessible in recent years, management liability, product liability, and property coverage remain constrained.

Hemp redefinition to create new friction

If rescheduling represents a tailwind, the revised federal hemp definition is the opposite.

In November 2025, Congress amended the legal definition of hemp to cap total THC content (rather than just delta-9 THC) at 0.3% on a dry-weight basis. The change also places new restrictions on certain cannabinoid products, including delta-8 and synthesized THC analogues, with enforcement set to begin in late 2026.

This opens potential exposures for hemp producers. One immediate concern is directors’ and officers’ liability. Companies that raised capital and built business models around now-restricted products may be forced to restructure, exit markets, or wind down entirely. Those decisions can quickly translate into shareholder litigation and governance disputes.

Product liability exposure is also in flux. Costa said carriers that underwrote hemp risks under the post-2018 framework now face a materially different regulatory environment. “Underwriting assumptions have changed. Carriers are going to have to reevaluate their entire hemp book… what’s covered, what’s excluded, and whether certain products are still insurable at all.”

To prepare for compliance, hemp producers and distributors must forge strong partnerships with testing laboratories. “The organizations that need to be the most responsive to this change between now and November are the testing labs,” said Costa. “They need to modify their standards, labelling, and reporting to comply with the new regulations on hemp product restrictions.”

Coverage gaps to watch and next steps for cannabis coverage

For brokers advising cannabis and hemp clients, Costa flagged product liability and product recall as the most critical coverage areas to review.

Policies in this space often rely on highly specific endorsements that list approved ingredients, cannabinoids, and product types. As federal definitions shift, gaps can emerge if newly restricted products remain in circulation but fall outside policy language.

“You absolutely can have a situation where something that was covered last year is no longer covered,” Costa said. “Clients need to read their policies closely and confirm that regulatory changes are reflected in their coverage.”

By contrast, Costa said lines such as workers’ compensation and commercial auto are unlikely to experience material disruption from the new rules.

Despite the uncertainty, the principal believes insurers are positioning themselves for a future in which cannabis is treated more like a standard commercial risk.

“Carriers that are entrepreneurial, that recognize the value of embracing the cannabis industry, can’t go in with both feet right now because of the legalization issues, but they are prepared so that they can react quickly,” Costa said.

In the meantime, brokers must pay close attention to regulatory details, lead proactive policy reviews with clients, and collaborate with underwriters as they navigate a rapidly evolving cannabis risk landscape.