* The cannabis business continues to expand throughout the United States with 33 states that allow some use of medical cannabis, 10 states that allow adult use of cannabis and most others that allow for limited medical use of CBD (cannabidiol). In fact, only four states bar the use of all cannabis products. While the federal Controlled Substances Act (CSA) continues to identify cannabis as a Schedule I drug, the Obama and Trump administrations have ushered in an era that provides some assurance to the cannabis industry that personal use of marijuana and operation of state-regulated cannabis businesses will not be the targets of federal prosecution. In turn, the expansion of the legal cannabis industry requires that it be able to manage risk through insurance for property and liability losses.
The current cannabis insurance market overwhelmingly comprises surplus lines carriers. There also are several smaller admitted carriers that operate in California. Several major commercial carriers should enter the market by the end of 2019, both on a surplus and admitted basis. Federal legalization will, of course, greatly accelerate this process. Unlike other business models, however, the application of insurance policy language to cannabis losses is in its infancy. Given questions on coverage, some states such as Oregon require insurers to clarify how policy language will apply. Other states such as California have encouraged the expansion of insurance products for cannabis.
The ultimate arbiter of the scope of insurance coverage for cannabis is the judicial system. The courts interpret policies, providing guidance to insurers and policyholders alike on the scope and limitations of coverage. Such decisions also prove instrumental in allowing both policyholders and insurers to assess risk and to identify needs going forward. While property and liability policies differ in their insuring clauses, conditions, and exclusions, there is overlap on some issues. Insurers also are likely to draft language that addresses risks unique to the industry for future policies that cross insurance product lines. The following cases highlight several issues peculiar to the cannabis world.
Choice of Law / Insurable Interest / Contraband Exclusion
A consistent theme in both contract law and insurance law is that courts will not enforce contracts that have an illegal object. In this respect, one of the threshold issues insurers and policyholders confront is whether insurance coverage disputes will be governed by state law or federal law. If state law applies in a jurisdiction where the insured's cannabis business was operating legally, an insurance contract will likely be enforceable. However, if federal law applies - or the insured is operating outside the bounds of applicable state law, for example by selling medicinal marijuana for recreational use - the insured may be deemed to be engaged in illegal cultivation or distribution, leaving the contract potentially unenforceable.
In Tracy v. USAA Ins. Co., 2012 WL 928186 (D. Haw. Mar. 16, 2012), an insured engaged in growing marijuana at home in accord with state law, and filed a claim when the marijuana plants were stolen. The insurer argued that if the federal court applied its policy language covering theft of plants to provide coverage for theft of the insured's marijuana plants, it would violate public policy since cannabis is illegal under federal law. The insurer sought summary judgment, asserting the insured did not have an insurable interest in the plants since they were federally prohibited. The court agreed:
The rule under Hawaii law that courts may decline to enforce a contract that is illegal or contrary to public policy applies where the enforcement of the contract would violate federal law. ... The Court therefore assumes, for purposes of the instant motion, that the "Trees, Shrubs and Other Plants" provision of the Policy covered the loss of Plaintiff's medical marijuana plants. Even in light of that assumption, this Court cannot enforce the provision because Plaintiffs possession and cultivation of marijuana, even for State-authorized medical use, clearly violates federal law. To require Defendant to pay insurance proceeds for the replacement of medical marijuana plants would be contrary to federal law and public policy. ... The Court therefore CONCLUDES that, as a matter of law, Defendant's refusal to pay for Plaintiff's claim for the loss of her medical marijuana plants did not constitute a breach [of] the parties' insurance contract. In Green Earth Wellness Center, LLC v. Atain Specialty Ins. Co., 163 F. Supp. 3d 821 (D. Colo. 2016), the court reached a different result. There, the insured operated a retail medical marijuana business, which Atain Specialty Insurance Company (Atain) insured through a Commercial Property and General Liability insurance policy. The insured made a claim for smoke and ash damage from a wildfire that impacted the ventilation system of the business and caused damage to the marijuana plants. Id. at 823. The insured's policy included a "contraband" exclusion that barred...