Up in Smoke…The Cost of Legalized Marijuana to Homeowners

Sean Maher is the co-founder of Swyfft, a platform that uses multi-patented big data and analytics to uncover accurate home insurance policies.

A hash lab exploded and fire spread through the apartment in midtown Ventura last month. The blaze started in the kitchen when the butane ignited in the second-story flat. A similar incident in September in Colorado Springs caused “extensive damage” to a duplex, also making its way to the attic of a nearby home.

Thanks to the legalization of marijuana in 26 states and the District of Columbia, impresarios of this nature are cropping up everywhere. And lawmakers are hot on their heels with new amendments to regulate production. From July 2015, hash oil extractions using combustible gas or an open flame are now considered a class two felony in Colorado, with a charge of up to 16 years in prison. These operations are having a big impact, not only for the DIY home producers, but lawmakers, fire departments, and the insurance industry, too.

A multi-billion dollar marijuana industry has led to a rise of indoor marijuana farms, amateur home labs and a growing ecosystem around this. New businesses seek insurance, as do small home operations and recreational or medical users. Insurers that fork out for damages at the hands of some of these operations are forced to reevaluate the market and liability. So what does the rapid growth of the marijuana industry mean for homeowners and how can insurers protect these people?

An exploding marijuana industry

In 2016, the legal marijuana industry value is expected to hit $7.1 billion. This is a lucrative market and it’s attracting a new labor force to parts of the country impacted by legislation. This means increased demand for real estate. In 2015, Denver reported an annual increase in home prices of 10%. And for industrial buildings that meet grower regulations for approved operations, the rent is rocketing.

The legalized marijuana industry is a multifaceted network with growers, sellers and distributors, along with an infrastructure of electricians, construction workers, security and more, all working closely together and contributing to local economies. This is stimulating the housing market, but this increase in demand—at the same time—comes with problems. Homeowners are cautious about living close to marijuana operations, and as the phenomenon of lab explosions persists, it is causing people to be more wary.

As amateur productions attempt to transition into larger scale operations, states like Colorado are witnessing major fire code violations at the hands of these new enterprises. According to Denver fire protection engineer Brian Lukus, these violations include overloaded electrical systems, noncompliant construction and unapproved equipment, with no certificate of occupancy. Businesses are required to have licenses approved by state and judicial agencies and fire permits, with inspections to reduce the risks. However a burgeoning industry means a rise of new entrepreneurs trying their hand at marijuana productions, with a lack of expertise and enforced regulation leading to explosive results.

So, who’s footing the bill for these exploding labs? As insurers haggle over damages, there is speculation that this will mean higher premiums for all to pay. And as business picks up, with new state legislation fueling the market, this is just the start of knock-on effects for homeowners.

Developing new habits and risks in the home

Between 2005 and 2015, some 8.6 million people in the US have stopped smoking cigarettes. This decline in tobacco smokers has been mitigated by a rise in marijuana smokers. A recent study in the British medical journal Lancet Psychiatry, revealed that 10 million more Americans smoke marijuana, compared to figures from 12 years ago. This brings the new total up to an estimated 31.9 million. The study also found the number of people using the drug on a regular basis, daily or near daily, has more than doubled, from 3.9 million to 8.4 million.

In Colorado, the National Survey on Drug Use and Health revealed that the number of adults who had used the drug in the last 30 days went up from 7.6% in 2012 to 12.4% in 2014. However, in 2016 legalization in major states means the industry faces a potentially enormous uptick in numbers, which could also have implications on the risk of home fires.

When it comes to the costliest damages of homes, fires are the leading cause of accidents initiated by humans. Smoking materials (meaning lighted tobacco products, not matches or lighters) cause five percent of an average of 365,000 home structure fires a year, clocking damages of around $7 billion, according to figures from the National Fire Protection Association (NFPA). For now, only time will tell if a climb in marijuana usage will correlate to a comparable increase in fire incidents across the country, and the impact this might have for residential fire safety and insurers.

How the insurance industry is responding

As the fast-growing marijuana industry accelerates, expected to reach a value of $21.8 billion in 2020, insurers aren’t exactly fighting to provide coverage for these new businesses.

The industry is legal under several state laws but not yet under federal law, which gives little incentive for insurers to jump on the bandwagon. But the industry will need protection; from the licensed marijuana farms growing millions of dollars of crop, to the medical smoker whose amateur operation puts their home at a greater risk of fire. Underwriters will need to decide how to handle marijuana within their policies, for those damages incurred as a direct result of marijuana production or consumption, or accidents that occur when people are under the influence. In Colorado, residents receive compensation for accidents, such as falling asleep smoking. But in other states this is not necessarily the case, and can often lead to court proceedings, personal liability and huge payments.

The insurer Nationwide recently received court backing to refund payment of just over $160,000 to a medical marijuana patient whose home lab caught fire. The provider claimed the facility was an “increased hazard” and an ”unacceptable risk” that it had not been made aware of. Similarly, in Hawaii insurers accepted a $9,000 claim for stolen medical plants, though when this rose to $37,000, USAA refused to pay, arguing that under federal law it was illegal.

Large-scale, country-wide advances in industry will dictate big changes for home insurers, and not only through increase in growers and the rise in house prices. If more people end up smoking, they’ll need to make sure homes are protected from fire hazards. But a rise of edible use as opposed to smoking marijuana would mean a different shift. Regardless, if people are spending increased periods of time in their homes, they are instantly at a greater risk of fire.

This all means understanding a new way of life, gathering new data and using this to map possible outcomes and calculate accurate policies. It is these nuances that insurers will need to understand to assess individual risk, helping them navigate new territory and effectively predict the future. There’s no smoke without a fire, and insurers know this. These businesses will need to make sure that as makeshift hash-oil labs and individuals across the country are lighting up, they’ve no risk of getting burned.