By David Rahn, VP of Account Services at Rahn & Associates
Introduction:
2024 has been a rollercoaster ride for the fledgling psychedelic medicinal industry. As with any niche industry still in its infancy, the risks are high. In this year-end analysis and 2025 outlook, R&A PYSINS, an independent insurance broker that has been at the forefront of the psychedelic movement, discusses recent developments, top risks from an insurance standpoint and the coverages necessary to protect businesses, professionals and investors from loss and lawsuits.
Lessons Learned in 2024
The Risks of Research & Innovation: While our country continues to grapple with how to best address the growing mental health and opioid addiction crisis, psychedelic medicines are being extensively researched and reported as being a game-changing therapy for PTSD, suicide, chronic pain, and other illnesses. As companies compete for investment dollars in this rush-to-market phrenzy, the risk of errors, misconduct and fraud multiply. Below are some of the lessons learned in 2024:
- The Food and Drug Administration’s (FDA) rejection of Lykos Therapeutics’ application to use MDMA in conjunction with psychotherapy to treat PTSD, was an unexpected blow to the company, its investors and the entire growing movement. In addition to loud concerns about the quality of the company’s clinical trials, as the scandal unfolded evidence of “unethical conduct,” and sexual abuse were revealed. Calamities like this underscore the importance of having Professional Liability/Errors & Omissions Insurance as one incident can have wide-spread devastating effects.
- The tragic death of Matthew Perry was a wake-up call for ketamine practitioners and the wider medical community. Clinics, retreat centers, and other businesses that administer psychedelic therapy are particularly vulnerable to lawsuits stemming from adverse effects, improper administration, or malpractice. Licensed professionals in this field must ensure they have malpractice insurance and their policy specifically covers psychedelic therapy.
- The CEO of psilocybin company Minerco Inc. was arrested on August 22, 2024 at Ronald Reagan Washington National Airport (where he was booked on a one-way flight to Tanzania) for fleeing a Securities and Exchange Commission (SEC) investigation into stock fraud. Headlines like this prove how important Directors and Officers (D&O) insurance is for protecting executives against lawsuits related to mismanagement, regulatory violations, or breaches of fiduciary duty.
Opportunities Ahead:
Despite the aforementioned setbacks, 2024 was marked by milestones worth applauding, such as the FDA granting “Breakthrough Therapy Designation” to LSD d-tartrate in treating anxiety disorders. Progress is being made in terms of decriminalization and clinical research. Even though the path to legalization remains unclear at the federal level, more states are pursuing their own policy reform agendas, rules and regulations. For example:
- Colorado, which legalized psychedelics in 2022 respectively, finally adopted rules in 2024 for its psychedelic therapy program. Starting in 2025, licensed businesses, called healing centers, will be able to offer its clientele a psilocybin journey under the supervision of a licensed facilitator and using psilocybin that was tested by a lab and sourced from cultivators and product manufacturers.
- Massachusetts could become the third state in the U.S. to legalize psychedelics and create a regulated access model for treating mental health conditions, as well as decriminalize these substances statewide for personal use. If voters in one of the most progressive states in the country approve Question 4, five psychedelics — psilocybin, psilocin, DMT, ibogaine, and mescaline — would be legalized for adults 21 and over by 2028, starting with one substance (to be determined) by 2026.
- Beyond Colorado and Oregon, some 28 states are contemplating a psychedelic initiative according to Psychedelic Alpha’s U.S. Reform Tracker.
There are too many factors and moving pieces to predict exactly what will transpire in the November elections and in the year ahead; however, we anticipate – and are cautiously optimistic – that further progress will be made in the areas of research, state and federal reform. One thing is guaranteed, the insurance industry will play a pivotal role in ensuring the long-term viability and success of psychedelic ventures, and the industry as a whole.
Five Critical Insurance Coverages for 2025 and Beyond:
- General Liability Insurance: The most essential coverage to protect from a variety of claims including personal injury, bodily harm, property damage, and other situations that may arise including slander, libel, copyright infringement and more.
- Professional Liability/Errors & Omissions (E&O): A type of specialized medical malpractice liability insurance that protects the business if it is accused of making mistakes (error) or failing to do something (an omission). Many industry professionals provide their therapies either on-site or remote through telemedicine and assist their patients throughout the course of their therapy. Patients require precise dosing and treatment, and there is no room for error. Therapists, guides, and facilitators involved in psychedelic-assisted therapies must be equipped with insurance that shields them from legal actions arising from allegations of negligence, malpractice, or failure to meet the standard of care.
- Directors and Officers (D&O) Insurance: As the psychedelic industry expands, attracting more investors and scrutiny, we can expect litigation to become a more frequent occurrence. D&O protects corporate directors and officers, as well as their spouses and estates, from being personally liable in the event your company is sued by employees, vendors, competitors, customers, or other parties, for actual or alleged wrongful acts in managing the company, including non-compliance with regulations or laws, employment practices and HR issues, theft of intellectual property, lack of corporate governance, underperforming company or stock performance, breach of fiduciary duty resulting in financial loss/bankruptcy, misrepresentation of company assets, misuse of company funds and fraud. In the event of a legal claim, this policy will cover fees, fines, settlements, and other substantial costs. If your business has outside investors, you cannot afford to pass over D&O Liability Insurance. In fact, many investors, officers, and directors require a company to provide D&O insurance.
- Product Liability Insurance: Any business that is involved in the production, distribution or sale of psychedelic compounds needs this type of specialized coverage to protect against claims related to the safety and efficacy of their products, including contamination, mislabeling, false advertising, or defective products. With proper coverage, your insurance company will pay for damages and legal expenses if you are sued, up to your policy limits. A product liability policy will also cover any medical expenses for those who are harmed by the psychedelic substance or treatment. The ability to access product liability insurance depends on the legality of the active ingredient in the state in which it operates.
- Cyber Liability/Defense Insurance: With the rise of telemedicine and online platforms for mental health services, many psychedelic therapy providers have adopted digital tools for managing patient care, scheduling, and even administering virtual therapy sessions. However, this increasing reliance on technology also raises the risk of cyberattacks and data breaches. Cyber liability/defense insurance helps protect psychedelic businesses from the financial fallout of data breaches, including legal costs, notification expenses, and damage to reputation. For clinics and therapists handling sensitive patient data, especially in a field like mental health, where privacy is paramount, cyber insurance is a crucial part of a comprehensive risk management strategy.
Factors Impacting the Availability of Business Liability Insurance
The psychedelic medicinal industry is still in its infantile stages and, much like the cannabis industry, it’s federally illegal. This gray area creates major complexity for insurers. As the demand for psychedelic-assisted therapy grows, so too does the need for trained professionals. Each of these licensed professionals will need insurance. One of the most significant challenges that psychedelic businesses and clinicians face today is accessing the necessary insurance coverages to protect themselves from malpractice and other claims.
The good news is that as the industry continues to gain legitimacy and acceptance, we expect to see broader availability of specialized coverage, as well as new insurance products designed for emerging business models, including telemedicine, retreats, and psychedelic startups engaged in research and development.
Summary
This is an exciting time to be a part of a cutting-edge industry that has the real potential to treat millions of American’s mental health disorders without relying on Big Pharma drugs. Despite the challenges, there is significant opportunity. The race in the space to innovate and bring various types of psychedelic drugs, therapies, and treatments to market shows no signs of slowing down.
Whether you operate a ketamine clinic, host medicinal retreats, research and develop psychedelic compounds or are looking to expand from cannabis to psychedelics, having the right insurance policies is critical and an essential component of any psychedelic venture’s Risk Evaluation & Mitigation Strategy (REMS).
If you have questions regarding the specific products or treatments you are, or will be providing, and what insurance coverages are available in the state you operate, please contact David Rahn at (954) 790-6604; [email protected] or click here to schedule your call.
Author Bio:
David Rahn is an independent insurance broker specializing in custom insurance solutions for businesses operating in highly-regulated industries. David has been at the forefront of the ever-evolving cannabis industry, establishing S2S Insurance Specialists in 2017. He leveraged his knowledge and experience in cannabis to expand into the burgeoning Nutra-Health Life Sciences areas of psychedelic and natural medicine. He co-founded R&A PSYINS in 2021 to provide psychedelic ventures throughout the ecosystem with access to critical business liability insurance coverages.
