Do Cannabis Companies Need Flood Insurance?

The biggest factor in understanding your flood risk is the geography of your environment—your location. Proximity to coastal areas, rivers, and lakes is the biggest indicator of flood risk, although low-lying urban areas with poor drainage are also at risk.

Even if you’re not historically in a flood zone, weather patterns are shifting. Climate change is increasing the frequency and intensity of weather patterns, including torrential rain and hurricanes, changing the landscape of flood risks. Areas that were previously considered safe may now be at risk of flooding. Urban areas are at risk too; flash flooding is becoming an increasing issue as storm drains become overwhelmed during heavy rainfall.

Cannabis operators have unique vulnerabilities in floods. Outdoor grows are the most obvious example of this—direct exposure to heavy rainfall can ruin or even wash away an entire cannabis crop. But cultivating indoors and being further into the supply chain is no protection from floods. Water can damage everything it touches, from cannabis crops and electrical systems to HVAC systems, specialized machinery, the insides of buildings, and high-value cannabis inventory. What happens if your entire business has to stop after a flood?

FEMA, the agency that runs the National Flood Insurance Program, defines a flood as “a general and temporary condition of partial or complete inundation of two or more acres

of normally dry land area or of two or more properties (at least one of which is your property)

from:

• Overflow of inland or tidal waters;
• Unusual and rapid accumulation or runoff of surface waters from any source;
• Mudflow*; or
• Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.”

Did you know that flood damage is a common exclusion from standard commercial property insurance policies? Nearly all policies that protect property exclude flood damage, unless otherwise specified.

But even in other policies, flood damage is commonly excluded from coverage.

• Named perils policies typically will not include floods as explicitly covered.
• An “all-risk” policy (also called “special perils insurance”) is a broad protective policy that also specifically excludes floods.
• General property insurance may cover water damage (such as a burst pipe) but typically do not cover floods either.

Even if you think you’re protected from flood damage from your other policies, you’re likely exposed. Flood damage can be so sudden and extreme that most insurance policies won’t include it in any other coverage. It’s essential to have a flood-specific policy to help cover the financial burden of building repairs, product and instrument replacement, and costly business interruptions.

Cannabis flood insurance protects valuable assets from the incredible damage large amounts of water can do.

Protecting High-Value Assets

Cannabis products, whether raw or finished, are incredibly valuable. These products are also easily ruined by a small amount of unwanted water, let alone a flood. In the case of rising floodwaters, cannabis products can be quickly ruined, leading to significant financial loss.

It’s not just the plant or cannabis products that are vulnerable—expensive equipment like grow lights, dehumidifiers, HVAC systems, and extraction machines are all vulnerable to water and costly to repair. Rapidly rising water levels can also damage infrastructure, from the structural stability of your building to electric and plumbing systems. In a worst-case flood scenario, a cannabis business could lose nearly everything.

Mitigating Business Interruption

In addition to causing untold amounts of damage, floods also cause massive business interruptions. Floods and the damage left behind can halt operations for weeks or even months, which can lead to a substantial loss of revenue. If you have to temporarily relocate your business, that’s not cheap either.

Even after the debris is cleared away, there’s a cost associated with repairing buildings. Drying out the facilities, hiring mold remediation, repairing drywalls or ceilings—all of these add up quickly.

Since floods cause widespread damage, yours is not likely to be the only business affected, which has a ripple effect throughout your local cannabis supply chain. Even if your business emerges unscathed, your vendors may not.

Regulatory Compliance and Contamination Risks

Floodwater isn’t sterile: it contains any contaminants commonly found in river water, like human and animal waste, as well as anything it picks up along the way, like pathogens, mold spores, chemicals from other farms—a host of potential contaminants for the cannabis and products that survive the initial deluge.

Cannabis compliance agencies take consumer safety seriously. Not only will your operation have to pull all products that are potentially contaminated, but prolonged operational shutdowns can also impact your ability to renew your licenses in some states.

Lender Requirements

Depending on where your business is located, some financial institutions have insurance requirements for loans, mortgages, or financing. If your property is in a designated flood zone, your bank may require you to have flood insurance. It’s all in the fine print.

There are two main options for cannabis companies looking for flood insurance.

A. National Flood Insurance Program (NFIP):

The first option is to get a policy through the National Flood Insurance Program, a federally backed institution offering flood-specific policies through the Federal Emergency Management Agency (FEMA). For many years, NFIP was the only flood insurance option, although private insurance options are now available.

However, cannabis companies may struggle to get coverage through a national program, given the federal government’s continued prohibition of the plant. These polices often have lower coverage limits than would be suitable for large cannabis operations.

B. The Private Flood Insurance Market:

Getting private flood insurance may be the best option for cannabis companies, as these policies often have higher limits and broader coverage than NFIP policies. It’s important for cannabis companies to obtain flood insurance through a specialized cannabis insurance broker who understands both the risk of flood and the nuances of working in the cannabis market.

Floods are a serious and increasingly common risk, and many cannabis companies are woefully underinsured. If your business is in a flood zone, investing in cannabis flood insurance is a crucial component of creating a comprehensive umbrella of insurance to protect your bottom line and your business against potentially catastrophic losses.

When it’s raining, it’s already too late—don’t wait until the storm is overhead to protect your business. Reach out to your insurance broker today to discuss your specific flood risk and explore coverage options to protect yourself.

Protecting your cannabis company can seem confusing; however, we’re a full-service insurance brokerage working with carriers worldwide to offer you the best coverage possible. We’re here to help! Please reach out to us today by email [email protected] or calling 646-854-1093 for a customized letter or learning more about your cannabis insurance options.