Understanding the Impact of Marijuana’s Schedule III Status on Cannabis Insurance

The cannabis world is buzzing about a potential reclassification of marijuana from Schedule I to Schedule III under the Controlled Substances Act. If this change occurs, it will represent a significant shift—especially regarding taxes and market access. However, it won’t be a magic wand for the industry. For insurers, brokers, risk managers, and cannabis operators, the impact is best understood as a series of incremental tailwinds accompanied by new complexities.

The Real Upside: Investment, Taxes, and (Some) Stigma Relief

The most immediate benefit of a Schedule III designation is tax relief for cannabis businesses. Moving marijuana off Schedule I should effectively eliminate the punitive application of Section 280E, allowing these businesses to deduct ordinary and necessary expenses. This change alone can enhance cash flow, improve margins, and boost valuations—key elements for underwriting and investor confidence. More profitable, better-capitalized insureds are generally considered lower risks.

Related: EP. 103: What Insurers Should Know About Banking for Cannabis Companies

Another anticipated benefit is improved access to investment and capital. While enthusiasm should be tempered, as marijuana will still be a controlled substance, a Schedule III designation lowers perceived legal and compliance barriers for many financial institutions. Banks may become more willing to offer lending and full-suite banking services, exchanges might be more open to listings, and traditional institutional investors who previously stayed away due to Schedule I may re-enter the market. While this doesn’t “legalize” the business model, it significantly reduces friction in capital formation and mergers and acquisitions.

Lastly, Schedule III could further mainstream cannabis. Many carriers have already seen reputational concerns diminish in recent years. The primary challenges for most insurance companies have been federal illegality, banking issues, and comfort with reinsurance.

Common Misconceptions: Temper the Hype

While rescheduling is significant, it’s essential to avoid irrational optimism. Cannabis equities have been volatile for years, and the sector has faced fundamental challenges, including oversupply, competition from the illicit market, taxes, and state-level fragmentation. Schedule III doesn’t immediately resolve these issues, except for taxes.

Moreover, rescheduling does not “legalize” marijuana; it remains a federally controlled substance. Criminal prohibitions and restrictions under the Food, Drug, and Cosmetic Act will still apply. State cannabis regulations will continue to operate independently, without merging into a federal framework.

Another important nuance is that Schedule III aligns marijuana with a “prescription drug” model at the federal level. This means that FDA and DEA regulations will become even more relevant. Adult-use programs, which sell products outside an FDA-approved pathway, won’t automatically align with federal law. In fact, this could complicate adult-use markets if federal agencies decide to regulate more actively.

Insurance Market Impacts

Rescheduling will not simplify underwriting. The real-world risks—property, product safety, operational controls, compliance, and supply chain integrity—remain complex. In some cases, the risk landscape may become even more complicated as companies adapt to tax relief, capital inflows, and improved access to cross-border operations. Transitional risks are real, with new SKUs, larger facilities, and evolving regulatory oversight creating potential claims.

However, rescheduling should unlock capacity and higher limits in key insurance lines. Commercial property and business interruption coverage are likely to benefit as more carriers engage, facilities scale, and new portfolio-level programs become viable.

Director and officer coverage may also see improvements. Enhanced stock performance, fresh investments, and a reopening of public markets could support larger D&O towers and more competitive pricing. Yet, with growth comes increased scrutiny. Directors and officers will navigate a more complex environment, facing new factors such as evolving federal policies, potential FDA signals on product categories, and shifting disclosure expectations regarding regulatory risk and tax normalization.

Related: Texas Hemp Regulation Proceeds Despite Federal Restriction

Expect a more nuanced story in liability lines. Improved access to scientific research funding and clearer federal policies can help, but product liability will still contend with challenges related to labeling, dosing, recalls, and health risks.

Reinsurance will be a crucial factor. Access to Bermuda and London syndicates should improve as the stigma of Schedule I fades, easing Anti-Money Laundering and Bank Secrecy Act sensitivities. This could support larger property limits and more stable excess capacity. Still, reinsurance appetites will depend on the quality of data and clarity regarding federal enforcement.

What Changes – and How Fast – for Insurance Buyers

Change is likely to be gradual rather than sudden. Specialty surplus markets already serving cannabis will expand first. New entrants will likely proceed cautiously, testing loss experiences and relying on reinsurance to scale. Coverage innovations will roll out incrementally, often tied to lender requirements and improved financial transparency.

Expect a pattern of gradual capacity expansion in property/BI and D&O, with better limit availability for well-capitalized and controlled risks. There may also be steady but selective growth in reinsurance participation, especially where data quality and controls are strong. Caution may persist in casualty lines where loss experience and regulatory oversight are still evolving.

The Risk Backdrop: Health Claims and Hemp Uncertainty

The timing of rescheduling coincides with increased scrutiny of alleged health risks associated with cannabis use, including cannabis-induced psychosis and cardiovascular concerns. Plaintiffs’ lawyers are closely monitoring these issues, and cases are already emerging that focus on labeling and marketing adequacy. For insurers providing product liability and recall coverage, this necessitates a tighter underwriting focus on warnings, testing, and quality systems.

Another looming variable is the new federal ban on intoxicating hemp products, set to take effect in November 2026. The enforcement path remains uncertain, but the impact on retail channels and supply chains could be significant. This federal hemp ban will create overlap exposures for wholesalers, distributors, and brands operating in both marijuana and hemp product categories. Coverage terms and exclusions will need careful attention as the market adapts to this ban.

Bottom Line for the Cannabis Insurance Market

Key takeaways:

• Underwriting does not suddenly get easier under Schedule III. Transitional risks and evolving federal oversight persist and may intensify.
• Capacity should improve, particularly in commercial property, business interruption, and D&O, supported by better access to banking and reinsurance.
• D&O is poised for movement if valuations and deal flow rebound, but board-level risk management will become more complex.
• Market changes will be incremental. Expect a measured increase in entrants and offerings rather than a flood of cheap capacity.
• Watch the health-risk narrative and the 2026 hemp shift, as both will influence casualty underwriting and coverage negotiations.

Rescheduling is a meaningful step toward normalizing the cannabis business landscape. For insurance, it signals a cautious green light to proceed, with both hands firmly on the wheel.

Stewart is cochair of Wilson Elser’s national Cannabis Law Practice and regional managing partner of the firm’s Los Angeles and Orange County offices.

Topics
Cannabis

The cannabis world is buzzing about a potential reclassification of marijuana from Schedule I to Schedule III under the Controlled Substances Act. If this change occurs, it will represent a significant shift—especially regarding taxes and market access. However, it won’t be a magic wand for the industry. For insurers, brokers, risk managers, and cannabis operators, the impact is best understood as a series of incremental tailwinds accompanied by new complexities.

The Real Upside: Investment, Taxes, and (Some) Stigma Relief

The most immediate benefit of a Schedule III designation is tax relief for cannabis businesses. Moving marijuana off Schedule I should effectively eliminate the punitive application of Section 280E, allowing these businesses to deduct ordinary and necessary expenses. This change alone can enhance cash flow, improve margins, and boost valuations—key elements for underwriting and investor confidence. More profitable, better-capitalized insureds are generally considered lower risks.

Related: EP. 103: What Insurers Should Know About Banking for Cannabis Companies

Another anticipated benefit is improved access to investment and capital. While enthusiasm should be tempered, as marijuana will still be a controlled substance, a Schedule III designation lowers perceived legal and compliance barriers for many financial institutions. Banks may become more willing to offer lending and full-suite banking services, exchanges might be more open to listings, and traditional institutional investors who previously stayed away due to Schedule I may re-enter the market. While this doesn’t “legalize” the business model, it significantly reduces friction in capital formation and mergers and acquisitions.

Lastly, Schedule III could further mainstream cannabis. Many carriers have already seen reputational concerns diminish in recent years. The primary challenges for most insurance companies have been federal illegality, banking issues, and comfort with reinsurance.

Common Misconceptions: Temper the Hype

While rescheduling is significant, it’s essential to avoid irrational optimism. Cannabis equities have been volatile for years, and the sector has faced fundamental challenges, including oversupply, competition from the illicit market, taxes, and state-level fragmentation. Schedule III doesn’t immediately resolve these issues, except for taxes.

Moreover, rescheduling does not “legalize” marijuana; it remains a federally controlled substance. Criminal prohibitions and restrictions under the Food, Drug, and Cosmetic Act will still apply. State cannabis regulations will continue to operate independently, without merging into a federal framework.

Another important nuance is that Schedule III aligns marijuana with a “prescription drug” model at the federal level. This means that FDA and DEA regulations will become even more relevant. Adult-use programs, which sell products outside an FDA-approved pathway, won’t automatically align with federal law. In fact, this could complicate adult-use markets if federal agencies decide to regulate more actively.

Insurance Market Impacts

Rescheduling will not simplify underwriting. The real-world risks—property, product safety, operational controls, compliance, and supply chain integrity—remain complex. In some cases, the risk landscape may become even more complicated as companies adapt to tax relief, capital inflows, and improved access to cross-border operations. Transitional risks are real, with new SKUs, larger facilities, and evolving regulatory oversight creating potential claims.

However, rescheduling should unlock capacity and higher limits in key insurance lines. Commercial property and business interruption coverage are likely to benefit as more carriers engage, facilities scale, and new portfolio-level programs become viable.

Director and officer coverage may also see improvements. Enhanced stock performance, fresh investments, and a reopening of public markets could support larger D&O towers and more competitive pricing. Yet, with growth comes increased scrutiny. Directors and officers will navigate a more complex environment, facing new factors such as evolving federal policies, potential FDA signals on product categories, and shifting disclosure expectations regarding regulatory risk and tax normalization.

Related: Texas Hemp Regulation Proceeds Despite Federal Restriction

Expect a more nuanced story in liability lines. Improved access to scientific research funding and clearer federal policies can help, but product liability will still contend with challenges related to labeling, dosing, recalls, and health risks.

Reinsurance will be a crucial factor. Access to Bermuda and London syndicates should improve as the stigma of Schedule I fades, easing Anti-Money Laundering and Bank Secrecy Act sensitivities. This could support larger property limits and more stable excess capacity. Still, reinsurance appetites will depend on the quality of data and clarity regarding federal enforcement.

What Changes – and How Fast – for Insurance Buyers

Change is likely to be gradual rather than sudden. Specialty surplus markets already serving cannabis will expand first. New entrants will likely proceed cautiously, testing loss experiences and relying on reinsurance to scale. Coverage innovations will roll out incrementally, often tied to lender requirements and improved financial transparency.

Expect a pattern of gradual capacity expansion in property/BI and D&O, with better limit availability for well-capitalized and controlled risks. There may also be steady but selective growth in reinsurance participation, especially where data quality and controls are strong. Caution may persist in casualty lines where loss experience and regulatory oversight are still evolving.

The Risk Backdrop: Health Claims and Hemp Uncertainty

The timing of rescheduling coincides with increased scrutiny of alleged health risks associated with cannabis use, including cannabis-induced psychosis and cardiovascular concerns. Plaintiffs’ lawyers are closely monitoring these issues, and cases are already emerging that focus on labeling and marketing adequacy. For insurers providing product liability and recall coverage, this necessitates a tighter underwriting focus on warnings, testing, and quality systems.

Another looming variable is the new federal ban on intoxicating hemp products, set to take effect in November 2026. The enforcement path remains uncertain, but the impact on retail channels and supply chains could be significant. This federal hemp ban will create overlap exposures for wholesalers, distributors, and brands operating in both marijuana and hemp product categories. Coverage terms and exclusions will need careful attention as the market adapts to this ban.

Bottom Line for the Cannabis Insurance Market

Key takeaways:

• Underwriting does not suddenly get easier under Schedule III. Transitional risks and evolving federal oversight persist and may intensify.
• Capacity should improve, particularly in commercial property, business interruption, and D&O, supported by better access to banking and reinsurance.
• D&O is poised for movement if valuations and deal flow rebound, but board-level risk management will become more complex.
• Market changes will be incremental. Expect a measured increase in entrants and offerings rather than a flood of cheap capacity.
• Watch the health-risk narrative and the 2026 hemp shift, as both will influence casualty underwriting and coverage negotiations.

Rescheduling is a meaningful step toward normalizing the cannabis business landscape. For insurance, it signals a cautious green light to proceed, with both hands firmly on the wheel.

Stewart is cochair of Wilson Elser’s national Cannabis Law Practice and regional managing partner of the firm’s Los Angeles and Orange County offices.

Topics
Cannabis