For over 50 years, cannabis has been illegal under federal law. However, starting in 1996, states began to legalize cannabis for medical and recreational purposes. With diametrically opposed laws existing between state governments and the federal government, it is easy to become confused as to the consequences of conducting business with the marijuana/cannabis industry. As a result, the title insurance industry is facing a conundrum:
How do we insure property that involves a state’s legalized cultivation or sale of a substance that is illegal under applicable federal law?
For purposes of this article, we will not be discussing hemp, also known as industrial hemp, which was federally legalized through the 2018 Farm Bill. Hemp, while the same plant species as cannabis, contains very low levels of tetrahydrocannabinol (THC), less than 0.3 percent. Hemp can be used for a variety of products including clothing, textiles and rope, and the seeds can be eaten as a source of protein and Omega-3. Since hemp is legal under federal law, the title industry has no issues with insuring transactions involving property used to cultivate, process or sell hemp. The same is not true for cannabis.
Any discussion of title insurance and marijuana/cannabis-related property transactions must start with the Controlled Substances Act, Title 21 of the U.S. Code (CSA). Enacted in 1970, the CSA created five schedules of drugs/substances based on the potential for abuse. Under the CSA, cannabis is classified as a Schedule 1 drug, a category for substances considered to be unsafe and with a high potential for abuse. The CSA provided that possessing, selling or intending to sell cannabis was a felony. Cannabis still is listed as a Schedule 1 drug, meaning there is no legal marijuana of any kind permissible under federal law.
However, either through ballot initiatives or by legislation, many states have been enacting various legalizations of cannabis, which contradict the CSA.
California was the first state to legalize medical marijuana in 1996. Colorado and Washington were the first states to legalize recreational use in 2012. Currently, 37 states have legalized at least some use of marijuana for medical purposes, and 18 states and Washington, D.C. have legalized adult recreational use.
This increasing dichotomy between state and federal law has led to uncertainty and confusion as to whether there would be federal enforcement of the CSA in those states that have legalized medical and/or recreational cannabis. The confusion has been exacerbated by the different stated approaches of the last three administrations and the respective attorneys general.
Added to this confusing mix are three federal bills either proposed or soon to be proposed. The Secure and Fair Enforcement (SAFE) Banking Act passed the U.S. House of Representatives on April 19, 2021. The SAFE Act would allow financial institutions to provide services to cannabis clients without fear of federal penalties.
The Marijuana Opportunity, Reinvestment and Expungement (MORE) Act would remove cannabis from Schedule 1 of the CSA and eliminate related criminal penalties. It also includes equity provisions to benefit the communities affected the most by the prior prosecution of cannabis possession and sales. The MORE Act was re-introduced in the U.S. House of Representatives on May 28, 2021.
Most recently, on July 14, 2021, a discussion draft of the Cannabis Administration and Opportunity Act was released. This U.S. Senate bill would remove cannabis from the CSA, provide access to financial services for the cannabis industry, expunge past non-violent cannabis crimes and create a federal cannabis tax that would provide funds to be reinvested in the communities most impacted by prior cannabis convictions, while also enabling entrepreneurs in those communities a chance to participate in the growing cannabis business.
With states’ laws contradicting federal law, the DOJ continually amending its stated approach to cannabis prosecutions, and the threat of forfeiture as penalty under the CSA, many title insurance underwriters have refused to insure transactions involving property intended to be used for the cultivation or sale of cannabis. There are a few like NATIC/Doma that have worked with their title agents in limited circumstances to provide a program to insure cannabis transactions in the states where it has been legalized.
The passage of any of the federal bills mentioned above could lead to all title insurance underwriters insuring cannabis property transactions in the future. If you need assistance in clearing the confusion regarding cannabis property transactions now, please contact your state NATIC/Doma underwriting counsel or your NATIC/Doma agency manager.
Leigh Curry is Vice President, Midwest Regional Underwriting Counsel at NATIC/Doma