Damage Caused by Marijuana Cultivation Can Still Be Excluded, Even if Grown in A State Where it is Legal
August 27, 2018
The United States Court of Appeals for the Sixth Circuit has decided to affirm the lower courts ruling that the insurer properly denied coverage for a landlords insurance claim exceeding $500,000 in damage resulting from a tenants' use of the space to operate a medical marijuana-growing facility because the insured failed to demonstrate that the Michigan Medical Marihuana Act had been followed strictly, and therefore, the insurance policy's dishonest or criminal acts exclusion bars coverage. The case is K.V.G. Properties Inc. v. Westfield Insurance Co., No. 17-2421, 2018 U.S. App. LEXIS 23296 (6th Cir. Aug. 21, 2018)
K.V.G. Properties, Inc., (KVG) a commercial landlord, leased property to several commercial tenants. The properties were authorized for use as general offices or for light industrial businesses. In October 2015 the U.S. Drug Enforcement Agency raided the premises of one of the landlords properties and caught the tenants growing a lot of marijuana. KVG evicted the tenants, but the damage to the property had already been done. To accommodate the business of growing marijuana, the tenant had removed walls, cut holes in the roof, altered ductwork, and damaged the HVAC systems. The total cost of repair would amount to around $500,000. KVG filed with their insurance carrier, Westfield Insurance Co., (Westfield) for coverage. The agents disagreed and Westfield subsequently denied the claim finding that several exclusions applied to the case.
Westfield initially cited the “Dishonest or Criminal Acts Exclusion,” and argued that the tenants actions were criminal under either state or federal law, and that those actions were the main cause of KVG's substantial loss. Under the “Dishonest or Criminal Acts Exclusion” the court must determine if the tenants committed a “criminal act” within the meaning of the policy, an interesting question in todays' climate. Cultivating marijuana is a crime under federal law, but it is protected by Michigan law under certain conditions. The cultivator has to follow strict rules and guidelines very closely in order to be a protected activity under Michigan Law, specifically the Michigan Medical Marihuana Act.
Unfortunately for KVG, in their initial complaint in Michigan court, where they sought to evict the tenants for causing a “continuing health hazard, they claimed that their tenants violated the law by “illegally growing marijuana.” KVG also stated that the “illegal growing of marijuana” was a “continuing health hazard.” The pleadings were signed by KVG's attorney and used to evict the tenants. Under federal law, pleadings are binding legal documents that can be admitted as evidence against that party in subsequent proceedings (Fed. R. Evidence. 801(d)(2). Also, both parties accept that the property was raided by federal agents as part of a criminal investigation, which due to guidance from the Deputy Attorney General and specific prioritization, has a tendency to show that the tenants were not “in clear and unambiguous compliance” with Michigan law. So, Westfield's argument that a criminal act occurred is proven by a preponderance of the evidence, and it falls to KVG to identify evidence suggesting that its tenants had completely complied with Michigan's Medical Marihuana Act. KVG has speculated that its tenants could have been following the rules of the Act, but that is not a strong enough argument to change the mind of the court.
Next KVG argued that the Dishonest or Criminal Acts exclusion could not be invoked unless the tenants had been convicted for a criminal act. There has been no court cases or statutes that indicate that a conviction requirement is a part of the insurance contract, so the court denied that argument.
The court determined that the Dishonest or Criminal Acts Exclusion applies, and Westfield was justified in denying coverage to KVG.
Editor's Note: This case hinged on the actions of the tenants. Since medical marijuana is legal in Michigan, as is the cultivation and sale of medical marijuana, individuals who are participating in the cultivation of marijuana have the protection of Michigan law if, and only if, they are completely complying with the Michigan Medical Marijuana Act. In this case, the tenants were engaged in a potentially protected activity, growing marijuana, but they did not comply with the Act, and were therefore subjected to the federal DEA raid and the criminal repercussions of growing an illegal drug. Because the tenants did not follow the rules in place, they were participating in a criminal act, and because the damage to the premises occurred due to a criminal act, the landlord could not rely on his insurance policy to pay out for the damages. He will have to seek repayment from the tenants themselves.