“If you’re going through hell, keep going.” — Winston Churchill
The deadliest wildfires in California history erupted last October, spread by so-called Diablo winds whipping across the state and ravaging seven Northern California counties that are home to thousands of cannabis farms.
Forty-three people died, 100,000 were evacuated, and 8,900 buildings burned down. Property losses already exceed $3 billion and economic losses of $70 billion are predicted before the region recovers.
Agriculture will bear the brunt of these losses, but the cannabis industry will shoulder more than its fair share. Thirty-two cannabis farms were completely destroyed, along with crops valued at more than $150 million at retail. Santa Rosa, home to a growing hub of ancillary services, lost 5% of its housing to fire. And smoke spread throughout the Emerald Triangle region, contaminating plants far beyond the fire zone itself.
The federal government provides disaster relief, of which California has requested $7 billion. Crop insurance is subsidized and administered by the Federal Crop Insurance Corporation to ameliorate the massive risks of natural disasters like fires and droughts. As one can imagine, federal cannabis prohibition excludes cannabis farmers from protection, while worsening their losses — which often include unbanked cash kept on-site.
The industry’s black market past has also led to a critical lack of private insurance — whether due to reticence by insurers or farmers themselves (who often wrongly believe crop insurance is completely unavailable). California’s insurance commissioner is making urgent efforts to close coverage gaps, especially in light of forthcoming state licensing regulations. But the first state-admitted commercial cannabis insurer wasn’t announced until Nov. 2, so the effectiveness of that program remains to be seen and is, in any case, too late to help fire victims.
With the exception of outdoor crops, private insurance is available for many other types of losses, including harvested cannabis, lost income and even cash. But even businesses with such policies will face challenges. Policies written by agents unfamiliar with the cannabis industry often contain boilerplate policy exclusions for losses involving “criminal activities” or “controlled substances” that may result in claims being denied.
Indeed, whether insurance policies covering cannabis are even enforceable contracts has been litigated with mixed results (generally a contract with an illegal purpose is unlawful and unenforceable). A federal court in Hawaii held that, because possession of cannabis violates federal law, a dispensary owner could not sue its insurer for breach of contract based on its denial of a claim for lost marijuana plants. Conversely, Colorado’s federal court held an insurance policy covering cannabis plants was enforceable — particularly because the insurer knew what it was insuring when it issued the policy and accepted payment.
Court decisions since have, like Colorado, favored enforcement. And in California, a brand-new statute expressly provides that compliant commercial cannabis activity is a lawful object of contract and not against public policy. Nevertheless, uncertainty remains, and coverage disputes, allegations of bad faith and conflict with federal law are issues sure to rear their heads as insurance companies process significant cannabis claims for the first time.
California’s cannabis community has faced the wildfire tragedy with the same stoicism and solidarity it exhibited to stare down prohibition and legalize the world’s largest cannabis market at the ballot box. Yet, it seems legalization has brought all the costs with few of the same benefits enjoyed by mainstream agriculture. It is unfair and bitterly ironic that many small farmers invested large sums in regulatory compliance in the very same year they are now forced to bear the losses of a natural disaster without the legal protections compliance should ensure (pull quote).
California’s courts may, however, provide another road for recovery — one that is already being hastily paved by the plaintiffs’ bar. To-date, 11 negligence lawsuits have already been filed by more than a hundred plaintiffs against Pacific Gas & Electric (PG&E), Northern California’s electric utility company. The lawsuits allege that PG&E allowed excessive dry vegetation to accumulate beneath poorly-maintained power lines. Diablo winds blew down the power lines, igniting the brush and fanning flames of unprecedented destructiveness.
PG&E has faced similar liability in the past, including facing hundreds of millions of dollars in losses and punitive damages in connection with the smaller 2015 Butte Fire in Calaveras County. There, a tree came into contact with a power line and torched 70,000 acres (by comparison, more than 240,000 acres burned in the 2017 fires). Most notoriously, PG&E paid $1.6 billion in fines and $565 million to private plaintiffs after a deadly gas pipeline explosion in San Bruno in 2010.
As fire investigators continue their work, litigation gathers momentum with potential liability in the billions. Whether mass tort actions can cover the uncompensated losses of the cannabis community will take many years to answer.
Anthony Phillips is a founding member of the cannabis law practice at Archer Norris, which provides transactional and litigation services and legal advice to businesses in California’s legal cannabis industry. Archer Norris has more than 75 attorneys and four offices throughout California. He can be reach via email at email@example.com.