Insurers Disagree on Marijuana Loss Claims

The property-casualty insurance industry reflects the greatdivide in the United States over the issue of marijuana used formedicinal purposes.

Kip Diggs, a spokesperson for State Farm, acknowledged that hiscompany had been paying claims under homeowners policies inCalifornia for lost, stolen or destroyed marijuana used formedicinal purposes. Mr. Diggs said the reason for the payments wasthat “there had been some sort of legal basis for people to possessmarijuana for medicinal purposes.”

He was referring to Proposition 215, a referendum passed byCalifornia voters in 1996 that legalized the use of the substancefor medicinal purposes, including the easing of pain associatedwith specific medical conditions.

Alaska, Hawaii, Maine and Nevada are among a handful of statesthat have since passed similar laws, while a few other states alsoare reportedly considering their own measures.

The issue extends beyond U.S. borders. On July 30, for example,the “Marijuana Medical Access Regulations” under Canada'sControlled Drugs and Substances Act went into effect, said RandyBundus, vice president and general counsel of the Insurance Bureauof Canada, Toronto, the national trade association for p-c insurersin Canada.

Back in the United States, in May, the Supreme Court ruled thata so-called “cannabis club” in Oakland, Calif., violated thefederal Controlled Substances Act by providing marijuana topatients whose doctors said they needed it.

In an opinion authored by Justice Clarence Thomas, the Courtsaid that federal drug control laws state it is unlawful for anyoneto “knowingly or intentionally” manufacture, distribute ordispense, or to possess with intent to manufacture, distribute ordispense, a controlled substance.

Although the federal statute establishes exceptions, the Courtfound that only one exception is listed for marijuana and otherdrugs classified as “schedule I” controlled substances and thatthis exception is available only for government-approved researchprojects.

The Court also refused to recognize “medical necessity” as adefense to charges of manufacturing and distributing marijuanaunder the federal law. The decision indicated that “the statutereflects a determination that marijuana has no medical benefitsworthy of an exception (outside the confines of aGovernment-approved research project).”

The decision did not state that it was overturning Proposition215 or similar initiatives passed by other states. In fact, in aconcurring opinion, Justice David H. Souter stressed that becausemedical necessity defense was raised only to distribution charges,“whether the defense might be available to a seriously ill patientfor whom there is no alternative means of avoiding starvation orextraordinary suffering is a difficult issue that is not presentedhere.”

State Farm has interpreted the decision as throwing medicinalmarijuana “back into a contraband category,” Mr. Diggs said. As aresult, State Farm announced in July that it would no longer payclaims under homeowners' policies for lost, stolen or damagedmarijuana used for medicinal purposes, even in states where suchuse has been legalized.

“Under the provisions of our p-c policies, we don't pay forillegal substances or illegal items, period,” Mr. Diggs said.

State Farm's viewpoint is not universal. David Snyder, assistantgeneral counsel to the American Insurance Association inWashington, said: “If it's fairly clear that you had the right tohave [medicinal marijuana] and it's damaged or lost as a result ofsomething covered under the policy,” then its questionable whetheran insurer could reject a claim.

He suggested that insurers take a systematic approach to sortout the issue. First, they should ascertain whether it is legallypermissible for the claimant to have medical marijuana, he said. Byway of analogy, he noted that insurance companies would not pay aclaim for lost property that the claimant had stolen.

Assuming there is a right to have the property, the secondquestion is whether loss, damage or destruction of the property asa result of an event or occurrence covered under the policy hasoccurred, he said. “For example, did it burn up in a fire that youdidn't set, or was it stolen?”

If, instead, the substance was confiscated by the government,there would be “a lot of questions as to whether insurers have anobligation to cover that kind of thing,” he remarked.

Finally, if those two tests are met, the insurer would have todetermine the claim value, he said.

Mary K. Flynn, media relations manager for Farmers Insurance Co.in Los Angeles, suggested that whether health insurance pays inwhole or in part for medical marijuana would have a bearing when ahomeowners' insurer considers how much to reimburse a claimant.

Canada resolved this by providing no national health coveragefor medical marijuana. As explained by Roslyn Tremblay, mediarelations spokesperson for Health Canada, marijuana for medicinaluse is an out-of-pocket expense, because those qualified to use itdo so “at their own risk.” Headquartered in Ottowa, Health Canadais the federal department responsible for administering thecountry's Health Act.

Marijuana “is not a therapeutic product and has no status as adrug,” Ms. Tremblay said.

Don Griffin, director of business and personal lines for DesPlaines, Ill.-based National Association of Independent Insurers,acknowledged that the property section of homeowner's policies doesnot have a “real exclusion” for such losses.

However, he pointed out that the liability section of thepolicies excludes “anything that's illegal, specifically drugs.” Headded that the section refers to the specific provision in thefederal criminal code relating to illegal substances. As a result,he believes that even in states that recognize medicinal marijuana,insurers can rely on the policy language to avoid payingclaims.

“I don't think companies would be too wild about coveringsomething that's an illegal substance in this country,” hesaid.

In contrast, Farmers Ms. Flynn said that in states where thepossession or use of medical marijuana is legal, her company wouldtreat the substance as a prescription medication, in the samemanner that it treats Prozac. She explained that prescriptionmedicine is treated as “contents” under the homeowners' insurancepolicy.

To date, she said, Farmers has not been presented with anyclaims for medical marijuana-related losses. Nevertheless, she wasunsure what effect, if any, the Supreme Court ruling would have onFarmer's stated position.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, November 5, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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