According to a Pew Research Center survey, over two-thirds of Americans now support marijuana legalization. However, this has not always been the case. While the cultivation and use of marijuana were 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. 

Despite the strict federal regulations that remain in place in 2021, 14 states now allow recreational adult use, and 36 states allow for medical usage. With the increasing relaxation of cannabis laws, the industry has exploded. Despite the COVID-19 pandemic, Forbes reported that in 2020, U.S. sales hit $17.5 billion, representing a 46% increase from 2019. BDSA, a cannabis sales data platform, attributed the growth to legislation changes that have created new markets in states like Illinois, along with the fact that many states deemed dispensaries “essential businesses” during lockdowns.

Alongside the industry’s growth, there has also been significant consolidation. 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. 

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. This has meant that many large commercial insurance carriers, and particularly those that are publicly traded, have been 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 SAFE Banking Act and the CLAIM Act will likely pave the way for other bigger players to move into the market. The SAFE Banking Act, which was passed in the House of Representatives and will face a vote in the Senate, would allow financial institutions to provide services to the cannabis industry without facing fear of federal penalties. 

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 the content of the plant. Growers may sell the products directly to consumers 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.

What Lies Ahead?

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 SAFE Banking Act and CLAIM Act 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.

This article was co-authored by Michael Sternstein, CPA, CFE, Senior Manager in our Investigative Accounting and Litigation Support Group. Michael has over 20 years’ experience in forensic accounting.