Is there Coverage for a Marijuana Business Under a Commercial Property Policy?
A Carrier Who Knowingly Insures A Marijuana Business Probably Can’t Rely On An Illegal Acts Exclusion, But The Exclusion Bars Coverage For A Landlord Whose Tenants Surreptitiously Grew Marijuana.
Will a Change in Federal Enforcement Affect Coverage?
The business of growing and selling marijuana where it is legal under state law involves unique challenges. Many of these derive from the fact that, although legal for medicinal or recreational use under the law of some states, marijuana remains a controlled substance that is illegal to manufacture or distribute under federal law. Decisions from two federal District Courts highlight how this equivocal legal status may affect coverage under property insurance policies. For reasons that will become clear, a landlord whose tenants surreptitiously operated a marijuana business did not fare as well as a grower whose insurer knew he was growing medical marijuana. However, contemplated changes in federal enforcement activity have the potential to affect coverage.
In K.V.G. Properties, Inc. v. Westfield Ins. Co., United States District Court for the Eastern District of Michigan, Case No. 16-11561 (Memorandum and Order Granting Defendant’s Motion for Summary Judgment, November 8, 2017), a commercial landlord discovered that several of his tenants had been growing marijuana when the DEA executed search warrants on the premises. The tenants had made numerous unauthorized modifications to the units, including modifications to the HVAC systems. In addition, the moisture attendant to indoor growing operations had caused damage.
After the landlord’s property insurer denied coverage for the modifications and the moisture damage, the landlord brought suit alleging breach of contract and seeking a declaration of coverage. The landlord claimed that the damage was caused by vandalism, a covered cause of loss. The insurer relied on exclusions for a “dishonest or criminal act by you or anyone to whom you entrust the property,” for defective renovation, and for humidity, moisture or vapor. The court concluded that all three exclusions applied.
As to dishonest or criminal acts, the court stated that the tenants’ operations clearly violated federal law, and that the tenants had been dishonest in telling K.V.G. that they were conducting “light industrial or general office business” and in surreptitiously altering the units to facilitate their growing operations. Because K.V.G. had entrusted the property to the tenants, and the damage was caused by the tenants’ dishonest and illegal acts, the exclusion applied. K.V.G. has appealed.
In Green Earth Wellness Center, LLC v. Atain Specialty Ins. Co., 163 F.Supp.3d 821 (D. Colo. 2016), on the other hand, the insurer issued a commercial property and liability policy to a business it knew to be a medical marijuana grower. The court held that an exclusion for “contraband, or property in the course of illegal transportation or trade” was ambiguous in light of “the difference between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana” and the parties’ apparent mutual intention that the policy would insure the marijuana inventory. The court therefore denied the insurer’s motion for summary judgment on the contraband exclusion, and also declined to find the policy void as against public policy.
Green Earth distinguished Tracy v. USAA Cas. Ins. Co., 2012 WL 928186 (D. Hawaii March 16, 2012), where the court ruled that public policy precluded coverage under a homeowner’s policy for medical marijuana plants that were legal under state but not federal law, on the ground that the insurer in Green Earth knowingly insured a marijuana business and “in light of several additional years evidencing a continued erosion of any clear and consistent federal public policy in this area.”
Some insurers are now marketing policies to marijuana businesses. As Green Earth demonstrates, in the event such a policy contains an illegal acts exclusion, it may be susceptible to an argument that the exclusion is ambiguous, or renders the coverage illusory, or is contrary to the policyholder’s reasonable expectations, and should not be enforced.
However, in a November 29, 2017 press conference, United States Attorney General Sessions stated with respect to federal enforcement that the Department of Justice would be “working our way through to a rational policy. But I don’t want to suggest in any way that this department believes that marijuana is harmless and people should not avoid it.” Sessions stated that the DOJ is “looking very hard” at an Obama administration memorandum that encourages federal prosecutors to defer to state laws that legalize marijuana if states comply with certain guidelines. It is unclear at this point whether or to what extent Congress would fund federal enforcement, or whether a new DOJ policy would target states permitting medical marijuana or only those allowing recreational use. Active enforcement of federal law could undercut the Green Earth court’s rationale based on the lack of a clear federal policy with respect to state-regulated marijuana businesses.
Marijuana businesses may want to seek an endorsement clarifying that their policies’ illegal acts exclusions do not apply to violations of federal laws prohibiting the manufacturing or distribution of marijuana.
Posted In: Property Coverage