October was a catastrophic month for northern California. A perfect storm of weather conditions culminated in a series of wildfires that have killed at least 43 people, destroyed nearly nine thousand buildings and forced 100,000 people to evacuate their homes. Businesses in agriculture have suffered enormous losses as well, including the state’s cannabis farms. While most of the agribusinesses affected by the fires will receive the financial support they need to get back on their feet from their insurance providers, cannabis cultivators face total losses without those payouts, even if they are insured.
Though cannabis is legal in California (for medical use in 1996 and for recreational use in 2016), the plant remains a Schedule I substance, or, according to the Drug Enforcement Agency’s definition, a drug with a high potential for abuse and no medical use. Schedule I substances are federally illegal, and this prohibition has put cannabis entrepreneurs in a precarious situation. Josh Drayton, Communications and Outreach Director of the California Cannabis Industry Association, described just how devastating federal prohibition has been for cannabis cultivators impacted by California’s wildfires.
“We have members that have lost their farms, that have lost their crops, that have lost their homes,” Drayton explained. “A lot of these folks who were living at their cultivation sites tended to actually keep their cash in their home, whether it was in their safe or in a barrel.”
Looking at the Losses
But even the most safely guarded assets could not escape the inferno’s wrath. The Los Angeles Times reports a story about Cheryl Dumont and Ashley Oldham, two cannabis cultivators who face losses that seem insurmountable. Dumont lost a year’s worth of crop in the fire, but hoped that her savings had survived. Before the fire, she had buried $40,000 in silver and gold coins two feet deep in the forest. What she found after the fire was a melted mess. Oldham was a bit luckier. She lost her home, commercial processing buildings, and brand new materials for two greenhouses, but her existing greenhouse and the crop within it survived. However, like Dumont, she also lost tens of thousands of dollars in savings. The heat turned the cash—which had been buried in a safe beneath her house—to ash.
While the owners of grape orchards expect generous payouts to help them rebuild, these women—and the many other cultivators who lost their crop—will have to do it on their own, and in many cases, without savings.
With recreational sales scheduled to begin in January 2018, the waves of these losses will affect consumers (including medical patients), retailers, and any part of the state expected to benefit from cannabis-driven tax revenue.
Wildfires are not the only kinds of disasters that cannabis cultivators worry about. Theft is a huge threat too. The vast majority of banks are reticent to work with plant-touching businesses within the cannabis industry, so growers and retailers keep a lot of their cash on site. Security companies are often hesitant to provide their services to cannabis business sites, and in most states with regulated cannabis, dispensary owners and employees are required to provide their own transportation security even though assets are most vulnerable to theft during transport.
The Problems of High-Risk Business Insurance
Like any other business, those connected to cannabis face all kinds of risks that insurance is meant to mitigate, including electrical fires from overheated bulbs in indoor grow facilities and broken down equipment. While there are cannabis specific insurance companies providing coverage, they are few and far between, and they can be expensive. Other insurance companies may claim to provide coverage, but the fine print suggests otherwise. Michael Aberle, senior vice president of the cannabis-friendly insurance company Next Wave Insurance, said, “50 percent [of cannabis companies that have insurance] are covered by policies that flat out exclude marijuana.”
Terms included in insurance policies like “contraband,” “Schedule I,” and “health hazards” disqualify cannabis from coverage. But business owners and well-meaning insurance agents might miss that. Aberle explained, “When you have ‘Schedule I’ or ‘health hazard,’ those are two words in a policy that could be 5,000 or 10,000 words.” Cannabis companies paying premiums to these insurance carriers often end up with so many exclusions, that the coverage they have been paying for evades them by the time a loss comes.
The primary provider of insurance to cannabis products has been non-admitted carriers or high-risk carriers that have not been approved by a state’s insurance department. In California, Insurance Commissioner Dave Jones has been hard at work trying to change that for this state. Jones has been reaching out to well-known carriers in an effort to convince them to ensure the profitable industry. While non-admitted carriers have helped cannabis businesses get on their feet, they offer very limited products and often at unreasonable prices. If Jones is successful at bringing admitted carriers into the industry, it could mean a more diverse array of products at competitive prices. Given that most of the cannabis industry is either underinsured or uninsured altogether, this would be a game changer for cannabis entrepreneurs.
Is Rescheduling the Answer to Insurance?
As unfair as this arrangement is for cannabis businesses, it isn’t an unwise move on the part of the insurance companies. Pot’s federally illegal status makes it tricky to work with without potentially facing federal felony charges. As things stand now, you can’t. As long as cannabis remains a Schedule I substance, any entity that grows it, possesses it, distributes it, exchanges money for it, or empowers those who do any of the following are liable. Risk-adverse investors backing insurance companies probably aren’t up for that.
Insurance is good for business, and business is good for the economy. The many millions of dollars-worth of crop and savings lost in the flames of northern California translate to lost jobs, destroyed investments, and increased aversion to the risks needed to continue innovation. Had cannabis growers been afforded the insurance coverage every other industry has available to them, these losses would have cultivated both economic and spiritual resilience for those who suffered them. Because of prohibition, that resilience will come at a much higher cost.