Despite the legalization of medical marijuana use in 29 states plus the District of Columbia (D.C.), and the legality of recreational use in D.C. and eight states, marijuana remains a Schedule I banned controlled substance under the federal Controlled Substance Act of 1970.
Even in the states in which marijuana growth and use are legal, there are stark inconsistencies in the state laws, which has led to different legal outcomes in court decisions when the laws are tested.
Some insurers see the new marijuana laws as an opportunity to pursue new lines of coverage business in the billion-dollar marijuana industry. Others, however, are hesitant to take a foray into the new market due to the lingering risk of federal disapproval and uncertainty with the legality of insuring marijuana.
Marijuana use and growth directly impact both personal property and real property coverage issues that, due to a lack of national uniformity in legal decisions by the courts, has left a haze over appropriate policy drafting and claims coverage considerations.
Related: Are insurers paying for marijuana?
State legalization laws create coverage issues for insurers, since the governement still considers marijuana a Schedule 1 controlled substance. (Photo: Shutterstock)
Marijuana's legal status creates questions
The Department of Justice (“DOJ”) is charged with enforcement of the marijuana industry. While the DOJ's concern lies mainly with preventing underage consumption, impaired driving, and thwarting interstate smuggling, many believe that the DOJ will take further steps to enforce the federal prohibition of marijuana. Some believe that one such step may be a crackdown on states that have legalized recreational marijuana use.
Given the uncertainty over the federal government's intentions with respect to state legalization laws, it is understandable that some insurance companies are reluctant to make coverage available for risks linked to recreational use, cultivation, sales and distribution of marijuana.
Although insurance contracts are interpreted by state law, some states are taking steps to try to eliminate any ambiguity between the federal law and the enforcement of insurance policies at the state level. For example, the Oregon legislature enacted a law under which a policyholder's marijuana use, possession, cultivation or distribution cannot be used to deny an insurance contract's enforceability.
States such as Oregon, though, are thus far in the minority in terms of states taking proactive measures to address contract enforceability issues. Marijuana distributors and dispensaries, like any other business manufacturing and selling products, seek insurance coverage for:
theft of inventory and accessories;
destruction of marijuana through the distribution chain;
coverage related to ingestion injuries and claims of illness; and
workers’ compensation claims.
Although no state insurance regulatory authority prohibits the issuance of policies to marijuana businesses, some insurers have refused to do so due to the conflict of laws. The result is a “catch 22” in certain states with legalization laws that require marijuana dispensaries and distributors to carry property damage and general liability policies before they can obtain the necessary license to run their business. Carriers that do choose to provide coverage in such states do so in a manner best suited to minimize risk. This often means high premiums for insureds until insurers can determine whether the lines of coverage will be profitable.
Coverage for marijuana plants in a grow operation may not exist since growing them is considered illegal under federal law. (Photo: Shutterstock)
Property considerations: Coverage disputes & court decisions
Personal property considerations
Property coverage issues highlight the uncertainty and risk discussions insurers face with the marijuana industry. A primary concern for insurers is whether marijuana is insurable under policies drafted prior to legalization laws, as unanticipated risks may not have been agreed upon when the contract was signed.
For instance, many existing policies provide coverage for the loss of “trees, plants, shrubs, and lawns;” however, disputes arise when determining whether marijuana should be covered under these terms. Courts are forced to interpret not only the “plain meaning” of the words in the contract, but also the intent of the parties at the time that the policy was consummated.
In pre-existing policy contract situations, some insurers argue that the risk exceeds what was initially agreed upon as a basis to deny coverage, since an ounce of marijuana can in some instances cost several hundred dollars – far above what is normally contemplated when covering damage to a single plant, shrub or tree.
Others rely on the Insurance Services Office (ISO) Homeowner or Dwelling property policies legally allowed limits for coverage. Frequently, personal property limitations for an insurer's liability are in place, which typically only require an insurer to provide up to $500 for a single plant. These limitations may not be enough to cover marijuana plants in some instances.
In situations where contractual plain language or the parties’ intent are examined by courts when deciding policy disputes over marijuana plants, some courts choose to look beyond state contract law considerations and look to the federal Controlled Substances Act (something virtually all parties did not contemplate when drafting policy language prior to legalization laws).
For example, in the federal district court of Honolulu, a claimant relied on a policy provision for coverage for losses to “trees, shrubs and other plants” to argue that she was entitled to $45,000 for 12 marijuana plants stolen from her property. The court denied that coverage existed for the plants, finding that the claimant did not have an “insurable interest” in the plants, as Hawaii state law holds that an insurable interest must be lawful. The court found that since marijuana is illegal under federal law, the plants were not insurable.
Some states are proactively working on legislation to clarify the issue that arose in the Honolulu case. With states lacking a uniform approach, though, it is critical to be attuned specifically to the state's legislation when drafting policies.
Real property considerations
Part of the burgeoning marijuana industry includes cultivation facilities and home growers, both of which are legal in certain states. These businesses raise various real property coverage issues that insurers need to understand.
The marijuana cultivation process increases risks of property loss, especially due to the fire hazards associated with hash oil production, which typically use butane torches for extraction. In addition, cultivation requires lighting, heat and equipment that may cause circuit overloads on the property. Growers also require large amounts of water to grow marijuana plants, which increases the risk of water damage. The increased humidity associated with cultivation also fosters mold growth.
Largely unanswered by state courts and existing policies is whether damage to real property resulting from the cultivation of marijuana should be excluded due to its illegality under federal law. While an “illegality defense” may have been successful prior to a state's legalization of marijuana, it may not work for insurers drafting new policies with full awareness that they are insuring a marijuana business.
A federal district Court in Denver addressed this issue in 2016 when an insurer attempted to deny coverage to a medical marijuana facility damaged by a wildfire by claiming that the policy was null and against public policy because the risk was illegal under federal law. The court denied the insurer's request to declare the policy void and required it to comply with the policy terms or pay damages for breach of the policy, as the insurer created the policy with knowledge of the existing marijuana laws.
Colorado has taken protections to insureds one step further by passing a law whereby contracts cannot be deemed void as against public policy if they relate to legal marijuana activity.
There are liability risks for insurers that provide coverage for either medical marijuana or grow operations. (Photo: Shutterstock)
Protections & considerations for insurers
While courts and states attempt to resolve the legal issues created for the insurance world from the legalization of marijuana, it is critical that insurers closely monitor legal developments in states in which they write policies, whether marijuana is directly addressed as a concern for loss by the insured or not.
Insurers must consider the possibility of an insured requesting coverage for marijuana when writing new policies. This issue should be discussed thoroughly and spelled out clearly in policies until the state laws become clear.
Insurers should revisit standard insurance forms and reassess appropriate terms for today's market. Explicit language for coverage or clear-cut exclusions denying coverage should be considered for all property policies.
As marijuana legalization continues to gain acceptance across the country, insurers will need to assess the risk tolerance associated with policies to determine costs. Insureds should watch for high rates linked to coverage in the marijuana industry as policies develop. Time will eventually clear the haze clouding the marijuana industry for insurers and insureds alike. Until then, careful consideration to policy language and open dialogue are the best advice for anyone involved in the marijuana industry.
Seta Eskanian (firstname.lastname@example.org) is an associate attorney at CMBG3 Law in Boston, where she focuses her practice in asbestos and talc litigation, toxic torts, products liability and insurance defense. John Gardella (JGardella@cmbg3.com) is a founding partner of CMBG3 Law. He has practiced for over a decade in the areas of insurance, environmental, products liability and toxic torts litigation.