Background

A recent study published by the Journal of Addiction found that daily marijuana use is now more common than daily alcohol use in the United States. With over 85% of Americans supporting the legalization of marijuana for medical or recreational use, the cannabis industry is now firmly established in the mainstream of American culture. 

However, this has not always been the case. While the cultivation and use of marijuana was previously unregulated in the United States, during the Great Depression, a swathe of regulations came into place, and by 1931, 29 states had criminalized marijuana.  In the 1950s, mandatory sentences were put into place for offenses involving marijuana, and in 1970, the Controlled Substances Act was passed, which placed cannabis into the most restricted drug category, along with heroin and LSD. 

Although these strict federal regulations remain in place in 2024, 24 states now allow recreational adult use, and 38 states allow for medical usage. With the increasing relaxation of cannabis laws, the industry has exploded. Forbes reported that U.S. cannabis sales are forecast to hit $32.4 billion in 2024, up from $29.5 billion in 2023. The cannabis market researcher BDSA forecasts that the worldwide legal industry will reach $58 billion by 2028 with $46 billion of these sales coming from the exploding US market. 

Alongside the industry’s growth, there has also been consolidation in the industry. In 2020, Curaleaf Holdings, a Massachusetts based company that grows, processes and sells cannabis, bought the Chicago based cannabis retailer Grassroots for $830 million. Curaleaf Holdings also recently acquired 16 other operators in Florida, Arizona and Colorado, making it the biggest cannabis company by global sales with projected annual revenue of around $1 billion. More recent deals include the 2024 acquisition of Florida based VidaCann LLC by Planet 13 Holdings for $50 million and the acquisition of multiple newly opened Maryland companies by Canadian company TerrAscend Corp for just under $30 million. 

Insurance for Cannabis Businesses 

Although many states have relaxed regulations, cannabis remains a Schedule 1 substance under the Controlled Substances Act of 1970, meaning that under federal law it is illegal to manufacture, sell, or distribute cannabis. In a significant shift in policy, the Justice Department introduced a proposal to reclassify cannabis as a less dangerous drug in May 2024, and President Biden publicly endorsed their recommendation.  However, while cannabis is still classified as a Schedule 1 substance, many large commercial insurance carriers, and particularly those that are publicly traded, are hesitant to offer cannabis coverage due to the fear of federal illegality and reputational damage. Nonetheless, the National Law Review reported that there are currently over 30 surplus lines carriers and several managing general underwriters that currently service the cannabis industry across many lines of coverage. 

Furthermore, the SAFER Banking Act and the CLAIM Act will likely pave the way for other bigger players to move into the market. The SAFER Banking Act, which was passed in the House of Representatives, would allow financial institutions to provide services to the cannabis industry without facing fear of federal penalties. In September 2023 the SAFER Banking Act cleared the Senate Banking Committee and in April 2024, Senate Majority Leader Chuck Schumer pledged to prioritize the act in 2024. More specifically related to the insurance industry, the CLAIM Act, which was introduced to the Senate in March 2021, would prohibit federal agencies from penalizing companies for insuring cannabis-related businesses. The passage of these acts will likely satisfy the concerns of the larger carriers and lead to further growth in the cannabis insurance market. 

Risks for Cannabis Growers

Cannabis growers range in size from large corporate operations to small, family run farms, growing for a variety of end uses, including medical, recreational and for cannabis research facilities. Growing facilities can be indoors with lights and irrigation, outdoors in greenhouses with a combination of natural and reinforced light, and fully outdoors.  

Running an agricultural business entails many different risks, and the cannabis industry is no different, with a heightened vulnerability to certain types of risk. For example, the London based Canopius Group estimated that 90% of cannabis insurance claims in the US involve some element of theft. This can be attributed to both the high resale value of the plant and the fact that, due to regulations, the businesses often operate on a cash basis. Even large corporations are at risk of theft, with one of Oregon’s largest cultivators, BlueSky Gardens, losing “hundreds of pounds” of harvested cannabis after thieves tied-up and beat the owner, driving off with the product.  

Cannabis plants are also highly susceptible to fluctuations in temperature and humidity. In another large well publicized loss, the largest marijuana grower in Colorado disclosed that it lost millions of dollars during an early winter storm in 2019, after half the company’s plants froze before harvest could be completed.  They were the largest grower in the state at the time and impacts of the loss rippled downstream to processors and consumers alike. For indoor growers, that rely on lighting, irrigation and air-conditioning, any equipment malfunction can be disastrous and result in whole crops being wiped out.  

Crop Insurance for Cannabis Growers

As the cannabis industry expands, and growers seek out crop coverage policies, losses will become more common. When calculating a loss in this emergent market, the factors of valuation are numerous and evolving, along with the number and type of products being produced.  

When valuing cannabis inventory, it is important to understand the production process from seed to sale. If growing the plant from seed, the growing process takes between three to eight months, with the plant going through four stages of growth:

• Germination (3-10 days)
• Seedling (2-3 weeks)
• Vegetative (3-16 weeks)
• Flowering (8-11 weeks)

However, growers often do not grow all plants from seed and instead take ‘clones’ (cuttings) from a ‘mother plant,’ which allows them to skip the germination and seedling phase. 

Indoor growing facilities typically utilize a perpetual harvest system and can harvest up to five times a year. For outdoor operations, the grower will be limited by the environment and will typically only harvest once or twice a year. After the plants are harvested, they will be dried and cured and then the product may be sold in plant form or processed for use in edibles, tinctures, concentrates or topicals.  

Policy language for crop coverage often distinguishes between the following categories of inventory: 

• Living Plant Material: Seeds, marijuana plants in the stage of vegetative growth, immature marijuana seedlings, and flowering mature plants in the growing medium.
• Harvested Plant Material: Mature marijuana plant material that is not situated inside the growing medium but is in the drying and curing process.
• Finished Stock: Mature marijuana plant material no longer in the growing medium, which has been completely processed and is ready for sale.

The valuation of the living plant material will vary greatly depending on the growth stage of the plant, with an immature plant having a substantially lower value than a fully flowering, mature plant. If valuation is based on sales value for finished goods, it would be necessary to determine the stage of growth at the time of loss, the expected yield of the plant, and the sales price of the material. Expected yield is impacted by a variety of factors including the number of grow lights and the strain of the plants and would be estimated based on historical results. It would also be necessary to deduct any non-continuing production or selling costs that would not be incurred due to the loss. 

Selling prices will vary from state to state depending on the strain, whether grown indoor or outdoor, current market prices and THC content of the plant. Growers may sell the products direct to consumer or have wholesale contracts with processors or dispensaries. 

Salvage proceeds, if any, will depend on the type of damage incurred, be it flood, fire, or another casualty. For instance, with frost or light mold damage, the biomass material may be cleaned and then sold for use by extractors and other material processing facilities, yielding ways for an insured or insurer to mitigate losses.

Conclusion

The long-stigmatized cannabis plant is turning a new leaf, and the recent relaxation of cannabis laws in the United States has allowed for explosive industry growth. While many large commercial insurance carriers have previously been hesitant to offer cannabis coverage due to the fear of federal illegality, it’s likely the passage of the SAFER Banking Act and CLAIM Act, and possible reclassification of the drug by the Department of Justice, will lead to further growth in the cannabis insurance market. Cannabis growers are seeking crop coverage policies, and the analysis of losses involves an understanding of the production process from seed to sale. For more information, contact us today.

This article was co-authored by Hannah Dingley and Michael Sternstein. Research by Clara Waterman and Joe Tamburro.