Cannabis: a growing exposure and an adjuster’s perspective

June 13, 2023

A legal cannabis growing operation inside a large greenhouse.
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Companies in the cannabis industry face a unique set of risks, from dispensary theft to greenhouse fires. On the property side, losses can range anywhere from a few thousand to upwards of a million dollars depending on the circumstances. For small startups and large brands alike, the damage isn’t always repairable — and when it is, it takes time to fully recover.

Coverage considerations

Insurance policies for cannabis businesses are fairly similar across the U.S. market. Coverages can include equipment, business interruption, crop, buildings and liability, to name a few. Regularly reviewing your policy and understanding how it works and what’s covered is essential. For example, what is classified as the building owner’s responsibility versus the tenant’s? While most insureds lease rather than own, tenants may make improvements beyond the shell, so if a loss occurs you’ll need to know what’s covered, and by whom.

Many policies require protective safeguards. This could include cameras in all elevations on the exterior of the building, no windows, steel-plated doors, key fob-access only, alarm systems, video surveillance or a vault room to store product. If the company overlooks any one of these safeguarding requirements, it’s possible they may not be covered for the loss. While the policies themselves may be “standard,” the losses and accompanying considerations are not, and that can be challenging to navigate without an experienced partner.

Understanding the extent of losses

The majority of claims my team handles are theft and break ins; fire is the next common occurrence. Let’s consider an instance in which the light bulbs hung inside a grow facility explode, causing the fixtures to fall into the plants below. Even if there’s not extensive damage to the structure, the smoke damage could be devastating. Ensuring lightbulbs are wired properly and changing them out every few years may seem costly, but will help mitigate the chance that they burst.

Another factor to consider: In the U.S., cannabis crops are regulated by the Food and Drug Administration (FDA), so if a plant is contaminated with smoke or another toxin, the grower has to destroy it. Let’s do the math: If a grower has a facility with 5,000 plants each insured at $115, that equates to $575,000.

In addition to the plant itself, we must take into account the creation of cannabidiol (CBD), which requires large equipment to process the hemp. The high-pressure cylinders used are flammable, and an explosion could lead to significant injuries and business income disruption. If this type of loss occurs, it can take as much as a year to rebuild and start over.

An adjuster’s role

Following a loss, an adjuster will visit the location, identify affected plants/product and determine the extent of the damage. Because cannabis is tracked seed-to-sale with the state that regulates it, inventory management is critical. Co-insurance is also strictly enforced, so between the insured and accountants, we help verify the financials. Once the numbers are clear, the insured is required to destroy the affected plans before cleaning and repairs takes place.

The cannabis industry is promising in its growth, but is often seen as uncertain and risky — without proper planning and an experienced loss adjusting partner, it likely will be. Sedgwick’s team of specialists have a deep knowledge of and experience within the cannabis industry. To learn more how we can support your organization, email [email protected].