Insuring Cannabis: The challenges of Insuring Cannabis Part 1

Cannabis business owners face a multitude of risks when operating their businesses. A properly constructed insurance program is one of the risk managements tools to minimize the risk of unforeseen events and costs associated with these vents. For those cultivating outdoor cannabis, parametric crop insurance to protect against the following perils: fire, excess heat, excess rainfall, hail, and frost. Today’s article will explain what parametric crop insurance is, which perils can be insured against and what agents need to know about costs and coverage pertaining to parametric crop insurance is essential to provide protection. Thankfully, there are specific parametric crop insurance products (defined below) to address these risks

What is Parametric Crop Insurance

Unlike other insurance parametric pays out based on a specific predefined set of triggering events and has a predefined payout based on preset magnitudes of these events. Common triggering events could be the amount of rainfall during a growing season, specific excess temperature, diameter, and intensity of a hailstorm, and so forth. With Parametric insurance the insured does not have to suffer a loss for payout to trigger; rather, simply experience a triggering event will trigger the payout of a claim.

The triggering event for parametric insurance can be extremely broad. Examples of some common definitions of a triggering event in such policies can be as follows:

1. Hailstorms where the diameter of the hail and intensity of the storm would define payout amounts
2. Rainfall where the amount of rain exceeds the payout threshold in a specific area
3. Temperature causing frost prior to a harvest in which the temperature drops below the pre-determined payout amounts.

To measure these occurrences, some parametric cannabis programs utilize on-site technology that gather real-time weather data and can measure for all the pre-determined perils. There are advantages to this type of insurance. Most notably, you know specifically the perils that you are insuring. These policies are also flexible in how much coverage an insured wants to purchase and how long the coverage lasts, instead of having to renew every year under most insurance policies

Perils Facing Outdoor Cannabis Crops

Most cannabis growers grow their products like any farmer would. This exposes them to the worst risks that mother nature has to offer. These risks include

• Fires: In particular, out west there is a significant risk of wildfires that can cause a loss. With a typical growing season of May to October, Cannabis growers run the risk of wildfires destroying their crops before they harvest.
• Floods: In many states, flooding is a concern especially if your farm is on known floodplains.
• Changes in weather patterns: Such changes include droughts, excess rain, temperature changes, frost other common weather-related problems such as hail or mudslides can cause a significant variation in the amount of cannabis produced and create an unexpected loss to a cannabis business
• Windstorms: Tornadoes or crossline winds can happen everywhere. But even without these storms, a severe windstorm can cause significant crop loss
• Frosts: Sudden freezes can kill growing for the season.

In many states, flooding is a massive concern, with many farms being ruined from the rivers overflowing their banks, along with the fear of mudslides. In states like Colorado, a blizzard at a bad time can ruin crops as happened in 2020, when the day after Labor Day, a freak blizzard caught Colorado’s growers off guard and ruined their crops.(1)

Lack of Government Assistance

Unfortunately for cannabis farmers growing cannabis with THC of more 0.3%, government assistance is extremely limited when it comes to compensation for these crops against disaster. A memo from the Department of Agriculture confirmed this. State-approved cannabis farmers will be unable to access federal U.S. Department of Agriculture (USDA) Emergency Relief Program funds due to cannabis’ Schedule I status under the Controlled Substances Act, Leafly reports. According to the Center for Insurance Policy and Research, private insurers are also discouraged from assisting cannabis businesses due to “conflicting state and federal laws” and “rapidly evolving regulations,” Leafly says. The organization said that cannabis growers face similar general liabilities and risks as other farmers, such as “workplace accidents, damage to property and crop failure” but are “especially prone to fires from both wild and internal sources,” the report says. (2)

What agents need to know about costs and coverage pertaining to parametric crop insurance

Coverage triggers only under specific and pre-defined conditions. Unlike typical property policies that require a specific property loss, parametric insurance can trigger on an event regardless of the actual loss sustained. As a result, an insurance carrier might have more flexibility in their coverage. They are also able to collaborate with their clients to determine what amount of risk an insured is willing to accept. There are other specific issues for a broker selling in the cannabis industry to consider.

There are other specific issues for a broker selling in the cannabis industry to consider

1. The premiums are higher, and you should prepare your client for higher-than-normal premiums
2. There are limited markets as many of the traditional carriers will not consider insuring this line of business given the Federal Classification of the cannabis as a Class I drug. Most of this business will be written on an excess and surplus lines basis (non-admitted).
3. Given the specialty of this line of business retail brokers should use a wholesale broker that is a specialist in this line of business.
4. National banks cannon accept the money earned by these cannabis businesses so insureds in this line frequently conduct business in cash.

Hopefully this highlighted some of the issues of understanding parametric insurance, the risks covered and what to look for. In part two of this series, we will address how to insure your indoor cannabis crops.

In the next article, we will look at how to insure your indoor crops. For more information about our Cannabis products please visit our website at www.plrisk.com/products/cannabis-insurance/ or contact Mike Peters Cannabis 

Product leader at mpeters@plrisk.com or 201-847-9175 ext 149. You can also reach out to Chris Boden at cboden@plrisk.com or by phone at 916-824-9169.

Download our free guide to Insuring the Cannabis Industry.