Cannabis: A growing insurance problem

Cannabis cultivation is one industry unlikely to disappear in a puff of smoke during an economic downturn. Indeed, it is virtually guaranteed to enjoy a real high.

The Drug misuse in England and Wales: Year ending June 2022 report, published by the Office for National Statistics in December 2022, revealed that since December 1995, cannabis has consistently been the most used drug in England and Wales.

It found that in the year to June 2022, 7.4% of 16 to 59-year-olds and 16.2% of 16 to 24-year-olds have reported using cannabis – this is similar to the recorded numbers for the year to March 2020 and year to March 2012.

However, influenced by Covid-19 property closures and the cost of living crisis seeing more premises being left unoccupied – due to increased heating bills, for example – insurance sector sources have recorded a continued uptick in cannabis related claims over the last 18 months.

Commentators believe this trajectory mirrors claims trends in 2008 and 2009, during the last national recession.

Amid this economic backdrop, landlords desperate to maintain an income can feel pressured into accepting higher risk tenants for their properties – and with this can come the risk of cannabis cultivation.

Exclusive data from loss adjusting company Sedgwick International UK, which was shared with Insurance Times in January 2023, showed a 166% increase in malicious damage claims between 2021 to 2022 where cannabis cultivation was known to be the specific cause at outset of the claim.

What type of joint?

This problem is particularly prevalent in large warehouses and other spacious commercial properties.

Mark Farrant, executive manager at loss adjusting firm McLarens, said: “Vacant premises are particularly at risk and are often broken into and taken over without the knowledge of the owner.

“But large-scale [cannabis] production can occur in everything from office blocks to pub cellars and we have handled claims in former bars, nightclubs and precinct shops.

“In 2019, a cannabis factory was even discovered inside a former Gala Bingo hall in Kettering town centre.”

Although offering more limited opportunities, residential property is now also becoming increasingly targeted for cannabis cultivation.

Stuart Williams, managing director at broker Thompson and Richardson, explained: “In recent times, there has been a switch to residential rental properties [for cannabis cultivation].

“Tenants using these for the harvest of drug crops are possibly now the biggest threat to private landlords.”

Across both commercial and residential property types, most cannabis linked claims are for malicious damage caused to walls, doorways, ceilings and fixtures and fittings by organised cannabis gangs seeking to insert suitable ventilation and heating equipment.

There are also significant recorded claims for fire – which result from accidents with heating equipment and from tampering with electrics – as well as the odd escape of water claim caused by leaks to irrigation systems.

Weeding out fraudulent claims

Because insurers need to establish whether property owners and landlords are complicit in tenants’ cannabis growing, fraud teams are playing a major role.

Laura Horrocks, head of fraud technology and intelligence at Sedgwick International UK, said: “Our starting point is to establish whether owners and landlords are involved, negligent or innocent.

“If they are complicit, they could be getting a share of the profits, or they could just be getting the rent and turning a blind eye. Or they could be negligent because they [have] failed to vet the tenant suitably.”

In many cases, landlords and owners have finally returned to their premises after being shut out during the Covid-19 lockdown or because the tenant has deliberately denied them access.

Some landlords have also been hindered by the fact that tenancy agreements only permit inspections at certain intervals – typically after 90 days in the case of residential properties and often longer for commercial lets.

“More than half of owners and landlords will be innocent victims,” continued Horrocks.

“Under 10% [of owners and landlords] are actually proved to be complicit. But proving something is very different from suspecting it and insurers have to pay out if there is no proof.

“There could be a further 30% to 40% of owners and landlords who are complicit, negligent or turning a blind eye.”

Potential solutions

Neil Defries, major and complex loss adjuster at Crawford and Company, reported that - in volume terms - cannabis cultivation still accounts for only 6% of the claims he investigates.

However, he added that these claims tend to be large – the major losses that he oversees are all over £100,000, with one current claim being in excess of £750,000.

Insurers, therefore, have been upping their game to combat this problem.

RSA has been working collaboratively with its technical claims teams and has set up a task force to detect and prevent this type of fraudulent claims. It is also sharing relevant information with the authorities.

Zurich, on the other hand, has tweaked its wordings on all residential and commercial policies.

It now requires extensive inspections to be carried out every three months and written references and bank details to be obtained from tenants, together with verification that at least one insurance premium payment has come via a bank account.

Meanwhile, Allianz is putting together helpful tips for commercial property owners and their brokers on what constitutes a good reference check – this includes reviewing an identity document with proof of address, a current bank statement, a previous landlord reference and a current employer’s reference.

But insurers and loss adjusters emphasise that brokers also need to be playing their part in vetting tenants and educating landlords about potential red flags – particularly regarding tenants who pay in cash, can’t provide references, or are reluctant to engage with landlords. Other telltale signs include rocketing heating and electricity bills and boarded windows.

In winter especially, alarm bells should also be ringing for landlords if more birds are gathering on the roof compared to other properties, if frost and snow is melting unusually quickly on the roof, or if there are high levels of condensation on the windows.

Scott Clayton, head of claims fraud at Zurich UK, said: “The message we want to get out there is that we all need to get better at this, especially in the commercial space where money is tight and people need tenants.

“We would like landlords to be asking for photographic ID and proof of previous addresses.”

Most of the suggested mitigation steps to combat cannabis-related claims revolve around asking for original documentation from tenants and validating it – this does not constitute rocket science.

But, unfortunately, the most straightforward and commonsensical safeguards are often the easiest to overlook.