Takeaways

Review coverage limitations. The decision is a reminder to carefully review all coverage limitations closely to ensure that what may be a "generous insuring agreement" is not restricted by "a litany of exclusions," as occurred in KVG. For example, as the Sixth Circuit suggested, policyholders should look for narrower criminal acts exclusions —for example, those triggered only by a "crime" or "conviction" — that do not apply broadly to alleged "criminal acts." Absent admissions from the policyholder that acts were "illegal" (as was the case in KVG), a court would be required to interpret exclusions narrowly and in favor of coverage, which may have led to a different outcome in KVG notwithstanding the broader language in the exclusion.
Make alternative coverage arguments. Do not abandon any alternative coverage arguments, especially given the insurer's burden of proof on exclusions, which requires that the insurer demonstrate that each aspect of the provision clearly and unambiguously applies to the loss at issue. In KVG, the court noted the potential for an argument that the criminal acts exclusion should not apply to tenants who, like KVG's, obtain "entrustment" by false pretenses. The KVG court declined to analyze this issue because KVG expressly chose not to discuss that element of the exclusion or argue it in favor of reversal. If possible, policyholders should adopt a "belt-and-suspenders" approach and consider raising all potentially applicable arguments to trigger coverage for a claim
Hire coverage counsel early. The decision underscores the importance of retaining coverage counsel early in any dispute, and certainly before any lawsuit is filed. Coordinating insurance and defense strategies can avoid arguments in underlying matters that may jeopardize positions in a later coverage action, as occurred in KVG as a consequence of statements made in the underlying eviction proceedings.
Be prepared for federal vs state law arguments. The KVG decision previews "federalism" arguments that are likely to reappear in future cannabis coverage disputes when state law permitting all or limited use of cannabis conflicts with federal law. As the Sixth Circuit recognized, federal courts "act as faithful agents of the state courts and the state legislature," and federal courts sitting in diversity emulate state courts that will enforce applicable state law. Federal courts "exercise even more care" when citizens of a particular state have approved cannabis use through ballot initiatives. This deference to state law, including legislation or other initiatives legalizing cannabis usage, may result in different outcomes on "criminal acts" arising from different facts or applicable state law.

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