3 Tips for Insuring Your Hemp Business

Contrary to popular belief, the 2018 Farm Bill did not, through its enactment, free the U.S. hemp industry from volatility and uncertainty. State regulations still vary widely. Law enforcement authorities can still crack down on hemp businesses without much warning, as Big Sky Scientific learned earlier this year. In the case of Big Sky Scientific LLC v. Idaho State Police, et al., police seized nearly 7,000 pounds of industrial hemp the company was transporting because hemp remains a controlled substance under state law. The business of growing hemp in these times of unpredictable and severe weather brings ever-increasing costs and risks. And don’t forget: While farmers across the country may be rushing to harvest hemp, the regulations within the Farm Bill (formally named the Agriculture Improvement Act of 2018) have only just been released for public comment.

Still, little doubt exists that the new law will have a huge impact on hemp growing—and hemp insurance—in the U.S. While the 2014 Farm Bill authorized states to launch pilot industrial hemp research programs, the 2018 Farm Bill took legalization a giant step further by removing hemp from its Schedule I Status under the Controlled Substances Act. Hemp with no more than 0.3% tetrahydrocannabinol (THC) is now a permissible agricultural crop for commercial production.

That designation means that for the first time ever, hemp is eligible to be covered under the U.S. Department of Agriculture’s (USDA) federal crop insurance program. Growing crops do not constitute “covered” property, so farmers who want to insure their most precious assets while they’re still growing in the ground must purchase crop insurance. Thanks to the 2018 Farm Bill, hemp growers will be able to purchase federally subsidized crop policies based on yield or revenue to cover the loss of crops brought on by drought, freeze, disease and most other natural causes (save for hail).

As of press time, according to the draft rules released for public comment by the USDA, the Federal Crop Insurance Corporation (FCIC) must offer hemp farmers coverage under the whole farm revenue protection insurance policy by the 2020 crop year.

Some hemp growers are already eligible, however. Farmers producing hemp for fiber, flower or seeds can obtain crop insurance coverage under the Whole-Farm Revenue Protection (WFRP) program for the 2020 crop year—but it is only available to those who are part of state or university research pilot programs as authorized by the 2014 Farm Bill. Everyone else must await final USDA regulations implementing the 2018 Farm Bill.

This all sounds complicated, right? And we have not even delved into crop hail insurance, which is not government subsidized and is sold by private insurers.

For all these reasons and more, preparing insurance budgets and finding cost-effective policies remains a daunting task.

“Hemp was only legalized federally in the U.S. with the passage of the 2018 Farm Bill, so 2019 will really be the first growing season for many farmers,” says Neil Hitchcock, an insurance broker and chief executive officer at Skyfront Bermuda Limited. That presents challenges for insurers, Hitchcock says.

“From an underwriter’s pricing standpoint, they want to look at the past performance of any book of business,” he says. “Underwriters and insurers want reams and reams of data—and if that data isn’t available, they get very nervous because they don’t know how to price it.”

In other words, if there’s no historic crop yield and no farming history to speak of, an underwriter can’t properly calculate the potential crop insurance risk. That could result in two unfortunate outcomes for hemp growers: the insurer decides not to write a policy out of fear of unknown risks, or the insurer prices the policy high as a conservative hedge against those unknown risks.

Not even Canada can help insurers gauge U.S.-based crop risk. Though industrial hemp has been legal in Canada since 1998, generating 20 years of insurance data from which to draw, Canadian weather is vastly different than what is seen in most of the U.S. and, as such, affects hemp crops differently, says Jonathan Miller, general counsel for the U.S. Hemp Roundtable, a coalition of hemp companies advocating for pro-hemp policies. So, U.S. insurers remain uncertain about how to mitigate risk to seeds, seedlings and mature plants.

Given that crop insurance is top of mind for many existing and emerging hemp companies, Hemp Grower spoke to leading experts to get their insights into options for insuring hemp businesses during the 2018 Farm Bill transition period. Here are three tips to ensure a profit by insuring crops.

1. Think like any other business

While federal crop insurance is still unavailable for many farmers, in the meantime, hemp companies are encouraged to secure traditional business coverage, says Corey Tobin, a cannabis and hemp insurance specialist with the brokerage Bolton & Company. Because every industry is different, the baseline of traditional business coverage varies widely. For hemp growers, the following list should be considered an essential (but non-exhaustive) checklist, according to experts surveyed by Hemp Grower:

• property/casualty insurance;
• product liability;
• general liability;
• inventory coverage;
• employment practices liability insurance;
• directors and officers liability;
• cyber liability;
• employee benefits; and
• workers’ compensation.

Tobin notes in particular that a must-have for all hemp companies across the supply chain is adequate product liability coverage. Hemp finds its way into an expansive array of goods, from oils, fuel and paint to cereal, bread and protein shakes. Product liability would cover every manner of hemp businesses in the event that the hemp itself somehow causes illness or injury.

In addition to traditional business coverage, many hemp farmers purchase crop hail coverage from private insurers. (This is separate from federally subsidized Multiple Peril Crop Insurance, or MPCI, which covers loss of crop yields from drought, excessive moisture, freeze and disease.) Assuming you are one of the hemp farmers still ineligible for federal crop insurance, the private market is the only option, which can become a costly and frustrating proposition.

According to experts surveyed for this article, private crop insurance for all of the protections noted, including hail, is not widely available and is often prohibitively expensive. By Tobin’s calculation, annual premiums for a $1 million policy could be as high as $150,000. Regardless of whether business owners decide to stomach the high costs for crop insurance, Tobin advises that hemp farmers should still avail themselves of inventory coverage. “The second that crop is harvested and transferred into a warehouse, you can cover that product with inventory insurance,” he says. “Securing coverage for a crop that’s still planted and growing is very expensive.”

Josh Smart, practice leader and chief sales officer of Hub International Limited’s Agribusiness & Farm Specialty Practice, says some clients tend to be so focused on insuring the hemp they lose sight of what happens after the hemp is cut and harvested.

“Work with a broker that understands the seed-to-sale process,” Smart says. “There are transportation exposures, storage of the harvested and dried biomass and business income insurance exposures.”

Spencer Mahoney, an insurance adviser at CCIG and head of the firm’s cannabis practice, agreed that with the passage of the Farm Bill, there is now a clear-cut case for business insurance—not just everyday property and casualty coverage, but also a comprehensive lineup that can help ensure a hemp business stays in business. Mahoney has observed that many hemp growers still have gaps in their coverage and that few insurance carriers have flexible insurance products for the unique business challenges faced by the fledgling industry.

However, Mahoney says growers often overlook directors and officers (D&O) liability, which protects the heads of companies from investor lawsuits for alleged operational failures and mismanagement. Hemp businesses may be overlooking D&O because many are small or independently run (a family farm, for example), and some have the perception that D&O is not really needed. But, as Mahoney explains, “D&O is important to protect the board and the investors and should be considered a top priority for any serious cannabis or hemp business.”

Another reason for the slow adoption of D&O insurance is its cost. Major carriers are waiting to get engaged in the market until they feel the hemp industry has matured from the standpoint of claims management, Mahoney says. That lack of competition means premiums are higher relative to other industries.

2. Manage risk one state at a time

In sections of the 2018 Farm Bill legalizing hemp, Congress struck a compromise between federal and state regulations: States can act as the primary regulators of hemp production within their borders so long as state regulations comply with the USDA’s federal requirements.

With this hybrid state-federal regulatory regime, hemp business owners must be intimately familiar with state regulations on hemp distribution, transportation, quality control, testing, reporting, record-keeping (track and trace), labeling/warnings, advertising and marketing, and disposal in states in which they operate. They must also make sure their insurance policies reflect these state-specific risks, says Ian Stewart, a partner with the law firm Wilson Elser and a co-chair of the company’s cannabis law practice.

The good news is that by now, this state-by-state strategy should be familiar to hemp growers who began cultivation following the 2014 Farm Bill. Both the 2014 and 2018 laws envisioned overlapping state and federal authority to regulate hemp. And until the USDA finishes writing regulations, the 2014 regulatory framework rules the day.

3. Don’t forget your risk mitigation roots

Because hemp was legalized only recently, major branded insurance companies have yet to offer products tailored to the unique needs and risks of hemp growing. That’s changing, Mahoney says, but it will take some time before competitive, comprehensive, turnkey solutions exist.

Until then, he says, hemp companies must take out lines of coverage where they can while maintaining a spirit of resourcefulness and risk mitigation by any means necessary.

“The people in this industry are used to people telling them ‘no’ or ‘we can’t do that,’” Mahoney says. “These people are very resilient. They’ve gone through a lot of regulation and change. Somebody tells them no, and they know they have to get it done themselves.”

To be sure, declining coverage is never advisable and should only be considered as a last resort, Mahoney says. In some cases, hemp business owners are declining private crop insurance because of the high costs, he says. But while the availability of insurance coverage for hemp businesses remains limited, there are insurers that are willing to underwrite such businesses, he says. And insurance will be critical in these initial legal growing years.

What do you have to lose? Great insurance salespeople never lose sight of what their customers have to lose—a house, a car, their life. Much in the same vein, hemp insurance salespeople should keep these numbers handy: According to the hemp advocacy group Vote Hemp, American farmers were licensed to grow 9,770 acres of hemp in 2016; 25,713 acres in 2017; 78,176 acres in 2018; and 511,442 so far in 2019. For hemp businesses, that’s a lot to lose.

Paul Barbagallo is a Boston-based writer and a former senior editor for Bloomberg News and beat reporter for Bloomberg BNA.