Wildfire risk is turning the heart of California’s cannabis industry upside down as insurance fades

Hannah Whyte is one of thousands of Californians who have struggled to insure their property in the event of a fire.

Her 77-acre ranch, nestled deep in a fire-vulnerable forest, lost State Farm coverage after the mountainous region burned six years ago and found itself excluded by the state’s insurer of last resort, meant to to protect the most vulnerable. It became uninsurable because of its crop: cannabis.

Whyte’s problem is becoming more common for weed farmers in the Emerald Triangle, which includes Humboldt, Mendocino and Trinity counties and has long been the epicenter of US cannabis cultivation. California legalized marijuana for recreational use in 2016, but the growers who fuel the state’s $5 billion industry are already struggling to find insurance given the federal ban on their crop.

With California’s major insurers pulling out because of fire risk, pot farmers are increasingly facing the risk of catastrophe on their own. Whyte said he relies on “water pumps and a strong dose of courage” to protect his home and farm, which produces up to 1,600 kilograms of marijuana annually. (State Farm did not respond to requests for comment.)

“It leaves growers and rural home businesses at serious risk,” added Whyte, 38, as she walked through the rows of green spiky cannabis plants on her farm on a recent afternoon.

Fueled by warm, dry and gusty conditions, California’s wildfire season is in full swing. This year, wildfires have burned nearly 1 million acres, prompted hundreds of thousands of evacuations, and destroyed more than 1,500 structures across the state. Firefighters are still battling three massive wildfires in Southern California near Los Angeles. As temperatures begin to cool, the threat of wildfires will continue into late fall across much of California. That leaves homeowners in fire-prone areas, but concerns are especially acute for ranchers.

Legal marijuana growers are not eligible for the state-created FAIR plan, which provides coverage to customers who can’t find it elsewhere. An underwriting guideline prohibits any “unlawful activity that increases the risk to a property” that “presents an unacceptable hazard.” A spokesman for the FAIR plan said insurers risk having no legal protection for violating federal law by covering properties involved in the marijuana business.

This left many small growers faced with two risky options: opt out of insurance or hide their business from the state-backed insurer. The latter presents a substantial risk that could lead to a lawsuit or loss of coverage. What’s emerging is a crisis for a billion-dollar industry already struggling to stay afloat in the top pot-producing state.

“I’m surprised that the FAIR plan doesn’t insure properties where cannabis is legally grown,” said former insurance commissioner Dave Jones. “The clear policy of the insurance commissioner and the Department of Insurance is that there should be insurance for the cannabis industry.”

The FAIR plan’s underwriting guidelines must be approved by the insurance commissioner, which means that person has the authority to override plan rules that prohibit coverage of cannabis properties, Jones said.

Michael Soller, a spokesman for the Insurance Department, declined to comment on the commissioner’s authority to change the FAIR plan’s underwriting guidelines. He said Insurance Commissioner Ricardo Lara “has taken numerous steps to improve cannabis coverage,” including sponsoring a 2022 state law that makes it not a crime for companies to provide insurance to people in the commercial cannabis industry.

“This is not as simple or easy as portrayed,” Soller said in an emailed statement. “If only it had been done that way years ago.”

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The FAIR plan’s risk exposure approached $400 billion as of June 30, up nearly 40% over the past year. Despite the tension, Lara announced a deal in July to extend coverage to higher-value properties.

“It’s quite a situation where he can get away with it for cannabis,” said Karl Susman, owner of a Los Angeles-based insurance agency. “The amount of money the FAIR plan has against their total exposure in California is appalling.”

Most cannabis is grown on small, family-owned farms. But over the years, legacy growers have been hit by competition from organized crime, high operating costs, the falling price per kilogram of wholesale cannabis and the state’s burdensome web of regulations. Larger corporate growers entered the market with more resources to reduce costs and expand operations, crowding out small farmers. There are about 5,000 active cultivation licenses in California as of September, about half of which are in the Emerald Triangle, according to the state’s Department of Cannabis Control.

These woes are now exacerbated by California’s home insurance crisis. Cannabis is more prone to wildfire risk than any other crop grown in the state, according to a study from the University of California Berkeley Cannabis Research Center. Fires and smoke exposure in 2020 and 2021 alone caused $2.4 billion in damage.

“Fire risk is unique to cannabis as a crop, not because of the inherent quality of its cultivation, but because of policy decisions about land use and where farms can be located,” said Michael Polson, director of the Center for Cannabis Research. UC Berkeley Cannabis.

Securing insurance for commercial cannabis is already no easy task. Many of the biggest suppliers won’t work with the industry because marijuana remains federally illegal. Insurance costs for cannabis growers are higher; the farms are located in areas that many major companies consider too risky; and insurers that offer coverage often want to sell more comprehensive policies than fire insurance, Susman said.

“You basically have a three-edged sword against farmers in this industry,” he said.

Jacob Soutsos and his family live on 28 acres tucked away in the wooded hills overlooking a river in Trinity County. He started growing cannabis four years ago with the goal of becoming a full-time grower. But a long and expensive legal battle with the FAIR plan — his parents’ former home insurer — forced him to abandon that dream.

Soutsos’ parents received a partial claim to rebuild their fire-ravaged home in 2017 before the insurer began investigating Soutsos’ cannabis operations, which he grew in a separate building not covered by the plan FAIR on the property. The discovery prompted the FAIR plan to drop his parents’ coverage for allegedly violating the terms of their policy, surprising Soutsos, who said he had no idea his licensed business could jeopardize their insurance.

After a years-long lawsuit, Soutsos’ parents eventually settled out of court, but were forced to file for bankruptcy after putting their savings toward the remaining construction costs of the house. Even then, they could only afford to build a small affordable housing unit, downsizing from their five-bedroom home. Hoping it would be easier for them to find a policy, Soutsos closed his cannabis business. He is now looking for work, although he is struggling to find stable, full-time work in his area, which is experiencing a shrinking job market.

“I stopped farming. I’m not going to watch this anymore,” Soutsos, 36, said. “I’m trying to protect our property and livelihood instead of trying to pursue my business endeavors.”

Soutsos’ experience serves as a cautionary tale that has prompted other law-abiding farmers in the area to hide their activities from the FAIR plan. A Trinity County farmer covered by the FAIR plan, who has withheld his name because growing cannabis violates the terms of his policy, said he had a roof leak earlier this year that he paid out of pocket instead of filing a claim in order not to be discovered. The thought of not having coverage weighs heavily on him because his mortgage depends on it: Lenders require homeowners to maintain title insurance to avoid foreclosure or losing their home.

“I hate to say it, but we’re probably committing some kind of fraud with our insurance,” he said. “My strategy with insurance and the mortgage is to pay it off and keep my head down. If a fire burns down my house, I expect to get nothing. In fact, we wouldn’t even file a claim and risk being sued.”

The FAIR plan would not disclose the specific dangers of growing cannabis. But insurers often deny coverage based on potential chemical exposure, fire and increased crime risks, according to Aaron Pelley, an attorney at the law firm Harris Sliwoski, who has represented cannabis growers in California, Oregon and Washington state for more than 17 years old.

Some of those concerns are legitimate, he said, arguing that growing cannabis is no more risky than other crops. “Insurers will continue to do what works for them,” Pelley said. “They want to raise the most money with the least risk, even though they are part of the venture industry.”

For now, growers like Whyte are preparing for the worst amid this year’s fire season. It supplied water, cleared vegetation and created a buffer of defensible space around the property. In the days before legalization, it was advantageous for cannabis farmers to hide in remote areas of the forest to avoid authorities, Whyte said. But today, an unforeseen risk is presented that has made them vulnerable to a new kind of danger.

“We just can’t leave,” she said. “It’s really just up to us to do the work to keep us safe.”

Top photo: Hannah Whyte at her cannabis farm in Willow Creek, California. Photographer: Jonah Reenders/Bloomberg.

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California Disaster Natural Disasters Wildfire Cannabis