Prospects brighten for marijuana producers seeking insurance coverage

Image of a fire in a field

Crop production conditions this year are, in a word, risky.

From record drought levels throughout the U.S. and especially across the Western regions, to water shortages and raging wildfires, marijuana and hemp producers are rightly looking to protect their investments to ensure their crops don’t literally go up in smoke.

But securing insurance for a crop that has been federally illegal for so long has been tricky, at best.

When hemp became a legal crop in 2018, producers also gained the ability to secure crop insurance through the U.S. Department of Agriculture – in addition to paying for private insurance policies.

As more states legalize medical and recreational marijuana, commercial insurance providers have been gearing up to expand coverage.

There are, however, limits on how far that coverage will go, causing some producers to opt out entirely.

Drought insurance

Federal agriculture regulators are authorizing emergency practices to help agricultural crop producers affected by extreme drought conditions.

The USDA’s Risk Management Agency (RMA) is working with crop-insurance companies to streamline payments to policyholders in drought areas, the agency announced in early August.

The agency is extending crop-insurance deadlines to help producers during the widespread drought, giving them more time to pay premium and administrative fees.

The RMA also authorized approved insurance providers to waive interest fees on Written Payment Agreements for an additional 60 days.

Hemp producers with crop-insurance policies should contact their agents when they notice damage, to allow the insurance company time to appraise the crop before any cutting or replanting takes place.

Farmers might also qualify for federal disaster assistance.

Outdoor versus indoor cultivation coverage

Although all insurance is ultimately considered disaster insurance, many insurance companies do not offer policies for outdoor cultivation fields, according to Charles Pyfrom, chief marketing officer of cannabis-focused managing general underwriter CannGen Insurance Services, based in Rancho Cordova, California.

“There are no controls in place – no sprinklers, no alarm mechanism, nothing to say, ‘Hey, I’ve got an issue, let me stop that,’” Pyfrom said.

“Our carriers that we represent don’t have a risk appetite for that, and so a lot of those large, open-scale farm type exposures usually go to more traditional farm-based agricultural markets, which are starting to entertain more of the hemp operators these days than they have in the past.”

Some boutique insurance companies provide bespoke policies that include crop disaster insurance for outdoor cultivators, including drought, wildfire and inclement weather events such as hail that can cause total losses.

But the cost might be prohibitive, Pyfrom said.

“To some degree, it’s just going to be a matter of how much are you willing to pay for it,” he said.

Many insurance agents sell both federal and private insurance policies, so they have the tools to help hemp farmers create custom programs.

Insurance solutions are often based on gathering direct feedback from cultivators, combined with aggregate data, according to Jeff Kleid, owner of Elite Risk Insurance Solutions in Newport Beach, California.

This process allows insurance companies to write appropriate policies.

“Sometimes, other causes of loss are excluded in a policy, so that’s where we come in to find the best deal specific to each operation and risk appetite,” Kleid said.

Most farmers know their land and know what coverage they need, he added.

“The better they know the land and the better they communicate with the insurance agent what their needs are, the better position they’ll be in,” he said.

For smaller farmers and lower-level coverage, building custom coverage based on multi-peril crop insurance is a good option.

However, larger farms and cultivators that have taken on investors might want to consider high-deductible plans, Kleid said.

“Probably the best solution for the larger farmer is a hybrid between traditional indemnity or parametric insurance coverage and surrounding that with a dollar-one captive insurance solution,” he said.

Private policies can include:

  • Living-plant coverage.
  • Product liability.
  • Goods in progress.
  • Business-interruption coverage.
  • Equipment coverage.
  • Inventory.
  • Finished stock.

Farmers can also add crop coverages for disasters and different types of weather events.

On the other hand, insurance companies are more willing to cover disaster events such as wildfires or general fires for indoor cannabis cultivators that operate in a greenhouse or warehouse.

“If there’s a wildfire that rips through San Diego and takes out a cultivation facility where they have living plants, is that covered? We certainly entertain that … all day long,” Pyfrom said.

Legalization could help

While insurance companies already provide a broad suite of services to help cannabis companies sustain their growth plans, federal legalization of recreational marijuana would be a huge step forward, both for MJ businesses and the companies that insure them, Pyfrom said.

But companies that are making, selling and marketing lab-created products such as delta-8 THC and delta-10 THC, as well as derivatives such as THC-O-acetate, might find it harder to secure insurance.

Because of the unregulated nature of the cannabis market and insurance being a state-regulator issue, too much gray area already exists, Pyfrom said, and insurance companies want to avoid having to develop multiple versions of a policy based on individual products.

“Since we write in such a broad approach, until there’s really clear and concise (rules) and that gray line isn’t being skirted, we’ve just chosen to stay away,” he added.

Hemp companies that are already “grandfathered in” with policies and diversifying with delta-8 and other lab-created products won’t necessarily have their policies yanked, Pyfrom said.

“Just like not every risk is created equal, not every operator runs their business in the same way,” he said.

“But we do ask about it during the underwriting process, and if we find that delta-8 (THC) is a major component of what they’re doing, there’s a good chance we choose to decline the risk – or at least talk through the nuances of, ‘What are you doing, how are you making sure it is legitimate and aboveboard?’”

Learn more about federal and commercial insurance options by downloading this free report.

Laura Drotleff can be reached at laura.drotleff@hempindustrydaily.com.