Insurers Disagree on Marijuana Loss Claims

The property-casualty insurance industry reflects the great divide in the United States over the issue of marijuana used for medicinal purposes.

Kip Diggs, a spokesperson for State Farm, acknowledged that his company had been paying claims under homeowners policies in California for lost, stolen or destroyed marijuana used for medicinal purposes. Mr. Diggs said the reason for the payments was that “there had been some sort of legal basis for people to possess marijuana for medicinal purposes.”

He was referring to Proposition 215, a referendum passed by California voters in 1996 that legalized the use of the substance for medicinal purposes, including the easing of pain associated with specific medical conditions.

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

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

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

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

Although the federal statute establishes exceptions, the Court found that only one exception is listed for marijuana and other drugs classified as “schedule I” controlled substances and that this exception is available only for government-approved research projects.

The Court also refused to recognize “medical necessity” as a defense to charges of manufacturing and distributing marijuana under the federal law. The decision indicated that “the statute reflects a determination that marijuana has no medical benefits worthy of an exception (outside the confines of a Government-approved research project).”

The decision did not state that it was overturning Proposition 215 or similar initiatives passed by other states. In fact, in a concurring opinion, Justice David H. Souter stressed that because medical necessity defense was raised only to distribution charges, “whether the defense might be available to a seriously ill patient for whom there is no alternative means of avoiding starvation or extraordinary suffering is a difficult issue that is not presented here.”

State Farm has interpreted the decision as throwing medicinal marijuana “back into a contraband category,” Mr. Diggs said. As a result, State Farm announced in July that it would no longer pay claims under homeowners' policies for lost, stolen or damaged marijuana used for medicinal purposes, even in states where such use has been legalized.

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

State Farm's viewpoint is not universal. David Snyder, assistant general counsel to the American Insurance Association in Washington, said: “If it's fairly clear that you had the right to have [medicinal marijuana] and it's damaged or lost as a result of something covered under the policy,” then its questionable whether an insurer could reject a claim.

He suggested that insurers take a systematic approach to sort out the issue. First, they should ascertain whether it is legally permissible for the claimant to have medical marijuana, he said. By way of analogy, he noted that insurance companies would not pay a claim for lost property that the claimant had stolen.

Assuming there is a right to have the property, the second question is whether loss, damage or destruction of the property as a result of an event or occurrence covered under the policy has occurred, he said. “For example, did it burn up in a fire that you didn'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 an obligation to cover that kind of thing,” he remarked.

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

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

Canada resolved this by providing no national health coverage for medical marijuana. As explained by Roslyn Tremblay, media relations spokesperson for Health Canada, marijuana for medicinal use is an out-of-pocket expense, because those qualified to use it do so “at their own risk.” Headquartered in Ottowa, Health Canada is the federal department responsible for administering the country's Health Act.

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

Don Griffin, director of business and personal lines for Des Plaines, Ill.-based National Association of Independent Insurers, acknowledged that the property section of homeowner's policies does not have a “real exclusion” for such losses.

However, he pointed out that the liability section of the policies excludes “anything that's illegal, specifically drugs.” He added that the section refers to the specific provision in the federal 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 paying claims.

“I don't think companies would be too wild about covering something that's an illegal substance in this country,” he said.

In contrast, Farmers Ms. Flynn said that in states where the possession or use of medical marijuana is legal, her company would treat the substance as a prescription medication, in the same manner that it treats Prozac. She explained that prescription medicine is treated as “contents” under the homeowners' insurance policy.

To date, she said, Farmers has not been presented with any claims for medical marijuana-related losses. Nevertheless, she was unsure what effect, if any, the Supreme Court ruling would have on Farmer'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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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