Fires expose uninsured pot growers’ risks
The devastating California wildfires of 2017 have exposed a major risk for the newly legal cannabis industry: the lack of insurance, underinsurance and invalid insurance policies among growers and other operators.
On Nov. 2, the California Department of Insurance announced it had approved the cannabis industry’s first commercial insurance carrier in California, Golden Bear Insurance of Stockton. Until now, the state’s multibilliondollar medical cannabis industry could only buy insurance from about two dozen so-called surplus lines, which are not as tightly regulated under California law as “commercial carriers.”
The majority of cannabis farmers do not have fire or crop insurance as cannabis remains a federally illegal drug. Marijuana businesses have much less access to banks, insurance and the finance system as a whole, and state-level
regulations to fill the gap have yet to be written.
The industry suffered potentially hundreds of millions of dollars in losses in the wildfires of 2017; many of those who lost farms could be wiped out by the blazes.
“We hope (Golden Bear) will be the first of many, but it’s very good news we’ve gotten one,” said state Insurance Commissioner Dave Jones, who spearheaded the effort this year. “The investors, owners and operators of cannabis businesses all should have insurance coverage available to help them recover when something goes wrong, just as any other legalized business does.”
Golden Bear Insurance spokesperson Stacey Jackson said the veteran company has fielded more than 100 industry inquiries in a few days and expects to begin writing its first policies in the coming week. “For us, it’s really business as usual. We’re small enough to be nimble so we could be the ones providing this out the gate.”
Golden Bear will offer cannabis businesses what it offers analogous retailers like liquor stores or restaurants: liability insurance, property coverage and products coverage.
Recovery efforts are continuing statewide after 17 wildfires in Northern California claimed 43 lives, torched more than 5,000 structures and burned more than 330 square miles. The record damage was heaviest in pot commerce epicenters of Mendocino and Sonoma counties — regions rich in cannabis farms as well as wholesale warehouses and extraction and manufacturing facilities.
The California Growers Association confirmed 44 damaged farms, with many more unreported, said director Hezekiah Allen.
Most farms that burned probably had anywhere from $250,000 to $1 million of product on the property, said Tim Blake, an industry expert in Laytonville (Mendocino County) and operator of the Emerald Cup, the world’s largest outdoor cannabis competition. Cannabis industry losses could easily reach into the hundreds of millions of dollars.
Insurance gaps threaten the industry’s growth, which requires capital investment from mainstream investors.
“This is a real problem for sustainability with so much projected growth over the coming years,” said Jason Horst, a San Francisco insurance coverage attorney who represents policyholders in the cannabis industry.
“How does one not have crop insurance? How do you farm cannabis in the modern world and not take this risk? For investors who’ve been
wiped out, why would they want to reinvest?” said Kevin Jodrey, who holds the Golden Tarp awards in Humboldt County in November and runs the Wonderland Nursery.
Even traditional farmers have trouble getting crop insurance from anyone but the federal government, said Jones.
California has had medical cannabis for 21 years, with city- and county-level licensing for stores but not farms. Operators with city and county licenses can and do get types of insurance, but their policies can be expensive, and include onerous exclusions.
“Commercial crop coverage has been impossible for outdoor farms to obtain,” said Horst. “Even those businesses that are ‘fully insured’ do not have comparable coverage to their counterparts in other industries.”
Pot business insurers have written policies that — counterintuitively — exclude pot. And when a pot business sues its insurer, it ends up in federal court, where rulings have been mixed.
“There is no substitute for reading the policy,” said Michael Sampson, partner in the Insurance Recovery Group of Reed Smith LLP in Pennsylvania. “Just within the past year, one carrier attempted to rely on the ‘contraband’ exclusion to avoid covering property damage to a greenhouse grow operation that it knowingly insured,” Horst said.
That case was the Green Earth Wellness Center LLC vs. Atain Specialty Insurance Co., in 2016 in Colorado. The insurer lost using the contraband defense, but it worked in a similar case in Hawaii.
Horst said a handful of insurers is “aggressively” marketing to cannabis business through affiliates. Since the pool of pot insurers is small, a few underwriters may be facing record amounts of claims, and seek to wriggle out of them.
The wildfires test a nascent, niche insurance market with unclear levels of reserves and no track record of payouts, said Sampson.
Insurance coverage in legal cannabis “is very much a work in progress,” said Horst. “The markets are maturing fairly fast, but not nearly enough to keep pace with the industry as a whole. There are novel types of risk to be covered, minimal competition, and little industrywide understanding of the unique insurance dynamics at play.”
Jones encouraged any cannabis business struggling to collect on its policies to contact the state’s insurance department. Even unregulated surplus carriers must follow certain state rules on handling claims, he said.