By: James R. Benjamin, Jr., Esquire and Ryan Ullman, Law Clerk
Insurance coverage issues related to marijuana, like most legal issues dealing with marijuana, operate at an intersection of often-changing state and federal law and policy.
As more states have legalized medical or recreational use of marijuana over the last couple of decades, there have been more individuals and businesses seeking to insure their marijuana plants and equipment. As a consequence, litigation over insurance coverage in the marijuana space has increased and is expected to increase further as more states legalize the use of marijuana for medical or recreational purposes.
De Facto v. De Jure Enforcement of the Controlled Substance Act
Twenty-nine (29) states and Washington, D.C. currently have laws legalizing medical marijuana. Nine (9) states and Washington, D.C. have legalized recreational marijuana. However, these states’ laws are at odds with the Controlled Substance Act (“CSA”), 21 U.S.C. § 801, et seq., which makes marijuana an unlawful Schedule 1 substance under federal law.
While possession of marijuana is de jure illegal vis-a-vis the CSA, de facto enforcement of the CSA in the states that have legalized or lessened their marijuana penalties has varied and been in constant fluctuation for nearly a decade. The current enforcement landscape is, at least in part, the result of various unclear pronouncements by the government regarding how federal authorities intend to enforce the CSA.
The CSA’s enforcement by the federal government significantly changed during the Obama Administration to permit states to enact their own schemes with regard to medical or recreational marijuana under the guidance of the Ogden Memo, issued by the DOJ in 2009. In that memo, the DOJ announced its commitment to the “efficient and rational use” of its resources, and stated that it would exclude from prosecution patients and distributors who are in “clear and unambiguous compliance” with state marijuana laws. This was a major shift in the federal government to de-prioritize use of federal funds to enforce marijuana prohibition under the CSA.
Recent changes, however, in federal policy towards enforcement of the CSA by U.S. Attorney General Jeff Sessions and the DOJ may have an effect on how insurers draft and structure their contracts to ensure that they are not exposing themselves to unreasonable risk or noncompliance with state laws. That being said, President Trump’s assurances earlier this year to officials in Colorado that legal marijuana would not be targeted by Mr. Sessions demonstrates that federal policy, even within the Trump Administration itself, is far from clear.
Swinging the Pot Policy Pendulum Back and Forth
Courts dealing with marijuana insurance litigation over the past decade have similarly had a difficult time reconciling the laws of their jurisdiction with federal law and policy. This is not surprising, given the lack of clear guidance on how to deal with such claims. If anything is apparent from these decisions, however, it is that federal policy regarding marijuana is a prime factor that courts will look at concerning marijuana insurance claims.
The importance of federal policy in shaping courts’ decisions with regard to marijuana insurance claims was first illustrated by Tracy v. USAA Cas. Ins. Co., No. 11–00487 LEK–KSC, 2012 WL 928186, at *11-13 (D. Haw. Mar. 16, 2012). In that case, the U.S. District Court for the District of Hawaii did not require an insurer to pay a claim to its insured under the “Trees, Shrubs, and Other Plants” provision of a residential policy when twelve (12) marijuana plants the insured was growing had been stolen from his property. The court found that, despite the Plaintiff being licensed to grow and having an insurable, “lawful interest” in the marijuana plants, requiring the insurer to pay under the policy would violate federal law and thus, be contrary to public policy.
A year after the Tracy decision, federal policy on marijuana was further pushed toward lesser enforcement of the CSA with the DOJ releasing the Cole Memo. Under the Cole memo, which was modeled after the Ogden Memo, the DOJ indicated that prosecutors and law enforcement should focus only on certain priorities related to state-legal cannabis operations, including, among others, preventing: (i) distribution of marijuana to minors; (ii) preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels; (iii) preventing violence and the use of firearms in the cultivation and distribution of marijuana. After the Cole Memo was issued, most federal prosecutions related to marijuana were halted unless they met the listed criteria.
The government’s easing of its position regarding enforcement of CSA as to marijuana, slightly clarified by the Cole Memo, may have led in part to the U.S. District Court for the District of Colorado’s decision in Green Earth Wellness Center, LLC v. Attain Specialty Ins. Co., 163 F. Supp. 3d 821 (D. Col. 2016). In Green Earth, the court found that a commercial insurance policy issued by Attain, an insurer, to Green Earth, a marijuana dispensary, covered partial loss of Green Earth’s “stock,” as defined by the policy, in marijuana plants when smoke and ash from a nearby wild fire overwhelmed Green Earth’s ventilation system, intruding into the growing operation and damaging the plants. Even though the policy contained a “Contraband” exclusion, the court disregarded it as ambiguous referencing the “nuanced and erratic” expression of the federal government’s differing de jure and de facto public policies regarding state-regulated medical marijuana. Also key to the decision requiring Attain to pay the claim was that Attain knew, or should have known, that Green Earth was operating a medical marijuana business notwithstanding Attain’s knowledge that federal law also “nominally prohibited” such a business.
Another illustrative case is K.V.G. Props., Inc. v. Westfield Ins. Co., 296 F. Supp. 3d 863 (E.D. Mich. 2017). In that case, the court granted an insurers motion for summary judgment after its insured, a commercial landlord, made a claim for mold damaged caused by its tenants growing marijuana in the building. The court held that the mold damage was excluded by the “Illegal/Dishonest Acts,” “Unauthorized Construction,” and “Repeated Moisture or Humidity” exclusions under the commercial policy. Importantly, the court noted that although the tenants’ operation might be legal in Michigan, it was unlawful under federal law, which was “illegal or at the very least dishonest.” In addition, even though KVG had not given tenants permission to grow marijuana, KVG had “entrusted the units” to the tenants and KVG had itself surreptitiously made the alterations to the building.
Takeaways and Trends
First and foremost, insurers should pay attention to the changes in federal policy and the inherent uncertainty involved with such claims related to marijuana. In January of this year, Attorney General Jeff Sessions issued a new memo for the DOJ rescinding the previous Obama-era policies, indicating that the previous issuances of guidance by the DOJ were “unnecessary” and “undermine[d] the rule of law,” and instructing prosecutors to “follow the well-established principles that govern all federal prosecutions . . . originally set forth . . . in 1980.”
With these policy changes by Mr. Sessions, it appears the marijuana policy pendulum could be beginning to swing again — this time, the in the opposite direction, returning towards a more strict enforcement of the CSA as it pertains to marijuana. If that is the case, insurers should be happy to know it is likely that courts will be more willing to find that contraband or illegal act exclusions in policies work to exclude marijuana items from coverage, despite being “legal” under state law.
Second, despite the DOJ pulling back on its lenient Obama-era enforcement policies, insurers should be aware of a trend toward courts interpreting existing policies more broadly to encompass marijuana claims. Ultimately, the policies would not have to change for insurers to face more claims which were not at all contemplated by the policies they issue.
While knowledge of the insured’s activities involving marijuana are certainly relevant, they are not always dispositive. As a result, insurers may avoid or be compelled to pay under a policy, even if they did not know about the insured’s possession, use, or growth of marijuana. In Tracy, for example, the court denied the insured’s claims as excluded from the “Trees, Shrubs, and Other Plants” provision under the residential policy, despite the insurer knowing the insured was a licensed medical marijuana user. An opposite conclusion was reached in Green Earth under a commercial policy. In that case, the court held that Attain knowingly and willingly entered into the contract with Green Earth and thus, could not avoid paying under the policy.
Part of the disparity between these two cases might be explained by the type of policy—commercial versus residential. While the policy in Green Earth covered the business activities of Green Earth, a medical dispensary, of which Attain was aware, Tracy merely involved a residential policy for which there was arguably little to no notice of such a claim. And while marijuana was a necessary part of Green Earth’s business operations, Tracy’s insurer had less notice of Tracy’s potential claim, despite its knowledge that Tracy was licensed to use marijuana.
To avoid facing an unexpected claim related to an insured’s involvement with marijuana, insurers should err on the side of providing additional exclusions in their policies to specifically exclude marijuana. For instance, an exclusion related to “controlled substances” as defined by the CSA would provide a work-around to state legislation that may make marijuana “legal.”
Lastly, it should be noted the above-delineated issues are and will become all-the-more important for insurers as state’s have begun to require mandatory insurance coverage for marijuana businesses. Washington State requires all recreational marijuana businesses to carry at least $1 million in commercial general liability insurance for bodily injury and property damage arising out of licensed activities and California requires cannabis operators to carry product and liability insurance.
James R. Benjamin Jr. has substantial experience representing and advising insurers and business entities in a wide range of matters including insurance coverage, lead paint compliance, abatement and notice requirements and minority-owned and women-owned businesses (MBEs and WBEs) certification, procurement, structuring and joint venturing and teaming arrangements. Mr. Benjamin can be reached at (410) 339-5787or firstname.lastname@example.org.
Ryan Ullman is a summer law clerk at PK Law. He is a rising 3L at the University of Maryland, Francis King Carey School of Law.