Over a decade after Washington state and Colorado became the first in the US to legalize recreational adult-use marijuana, the cannabis industry has evolved from a fringe market into a billion-dollar sector. 

A growing array of psychoactive products, touching everything from pharmaceuticals to wellness and consumer goods, are now legally sold across mainstream retail channels. However, with this rapid expansion has come an equally swift rise in lawsuits and heightened liability concerns, with significant impacts for insurance. 

One of the emerging risks in this sector is the influx of substances that are being sold alongside cannabis, such as hemp-derived cannabinoids, plant-based psychoactives, and psychedelics. 

Lee Woodruff (pictured), vice president and cannabis practice leader at Jencap Insurance Services, told Insurance Business that these adjacent products lack clear regulatory frameworks and standardized testing, making them difficult to insure.  

While the industry is exploring these new substances, insurance providers are taking a conservative approach, focusing primarily on more established cannabis products.  

“Carriers are cautious about providing coverage due to the uncertainty surrounding long-term effects and potential risks,” Woodruff said. 

Emerging substances in cannabis 

Kratom, a tropical tree native to Southeast Asia whose leaves have stimulant and opioid-like effects, is one of the products gaining more mainstream popularity. Promoted as a natural remedy for pain, anxiety, and opioid withdrawal, kratom is sold in head shops and health food stores throughout the US. 

While there are potential therapeutic uses, Woodruff said, the evidence is thin and not well-understood. Kratom is not yet considered a controlled substance by the US Food and Drug Administration (FDA), nor has there been standardized testing. 

“Probably 90% of (CBD retail shops) are selling kratom products,” Woodruff noted. “With kratom, uncertainty is the biggest issue. There’s no real federal oversight, and that lack of clarity makes insurance companies uneasy.” 

Substances like psychedelics are also on carriers’ radar, Woodruff added. In Oregon and Colorado, voters have approved the regulated use of psilocybin, the active compound in so-called magic mushrooms, for therapeutic purposes. Clinical trials are underway for MDMA-assisted therapy and other hallucinogens, with some results hailed as revolutionary for treatment-resistant depression and PTSD. 

However, these therapies also come with risks—both medical and legal. Several incidents involving adverse reactions, including psychotic episodes and suicides after treatment, have raised alarms. While these events are statistically rare, they pose serious questions for insurers, practitioners, and the companies developing these substances. 

“While inquiries are coming in (for psychedelics), few of the companies behind these products are at a stage where insurance is feasible. Most are involved in early-stage research or clinical trials,” Woodruff said. 

Finally, hemp-derived products, particularly those involving Delta-8 and Delta-9 THC, continue to boom but also face regulatory scrutiny. Marketed as a milder alternative to traditional marijuana, delta-8 is synthesized from CBD extracted from industrial hemp.  

Thanks to a loophole in the 2018 Farm Bill, which legalized hemp but not THC, delta-8 has been sold in gas stations, smoke shops, and online retailers across the country with little oversight.  

“Some states are trying to pass some new regulation around it,” Woodruff said. “Texas is deciding how it wants to handle Delta-8 and Delta-9 products.” Delta-8 is still legal to buy, sell, and possess in the state amid a legal battle brought to the Supreme Court. 

What’s next for product liability insurance in cannabis? 

As for cannabis insurance, the market for product liability and general liability coverage remains soft, according to Woodruff. New entrants have made the space highly competitive. “Rates are pretty cheap. I don’t really see how they could get much lower,” Woodruff said.  

The low pricing is driven by limited claims history, but it may also be creating a false sense of security. “It’s like an iceberg. There’s a ton of exposure out there below,” Woodruff continued. “You think it’s pretty limited exposure right now, but it’s out there.”  

Operators are also under intense financial pressure, particularly in oversaturated states, pushing them to forgo product liability coverage altogether. With no interstate commerce allowed, states are stuck with a glut of supply, causing prices to collapse. Not everyone will survive falling prices and shrinking margins, Woodruff said, and this could concentrate insurance premiums among fewer but larger businesses. 

“In Michigan, for example, where I am, they didn’t do a good job of capping the number of cultivators. So, there’s just an oversupply of product,” Woodruff said. “A pound of flower in Michigan was probably $4,000 at some point. It’s down to $600 a pound.”