In a recent decision, the United States District Court for the District of Colorado analyzed the gamut of potential coverage defenses to a claim for insurance proceeds for damage to marijuana at various stages of cultivation submitted by a medical marijuana grower. The Green Earth Wellness Ctr, LLC v. Atain Specialty Ins. Co., 2016 WL 632357 (D.Colo. Feb. 17, 2016). In doing so, the Court recognized the continued erosion of any clear and consistent federal public policy as to the possession and distribution of marijuana which would prevail over state law allowing medicinal or recreational marijuana use.

In Green Earth, the plaintiff maintained a medical marijuana retail location and an adjacent growing facility. Id. at *1. The plaintiff sought and eventually was issued a commercial property and general liability insurance policy (the “Policy”) by the defendant. The plaintiff submitted a claim to the defendant for damage to both growing mother plants and clones as well as damage to buds and flowers that had already been harvested and were being prepared for sale. That claim was eventually denied on various grounds.

On this factual backdrop, the Court considered the defendant’s motion for partial summary judgment and cross motions to determine questions of law. The Policy covers “Business Personal Property located in or on the [covered] building[s],” including “Stock,” defined as “merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.” Id. at *4. While the parties agreed that the harvested flowers and buds qualify as “Stock”, they disputed whether the damaged mother plants and clones are also covered as “Stock”. After considering the dictionary definition of the terms “raw materials” and analogous products, the Court found that there potentially was coverage for growning plants as “Stock.” Id. at *5. 

Nonetheless, the Court recognized that the Policy excluded coverage if the plants are “growing crops.” Id. at *6. Based largely upon evidence in the record which demonstrated that the defendant advised the plaintiff that the growing plants would not be covered and the plaintiff did not object, the Court ruled that other plants and buds were excluded “growing crops”. Id. at *7. The Court also rejected the plaintiff’s argument that logically the Policy would serve little purpose if it did not insure the very core of the plaintiff’s growing business, the marijuana plants. Id. at *8. While “[t]his might be true if the Policy provided no benefit to [the plaintiff], . . the Policy still insured [the plaintiff] against general liabilities that could arise from operation of a commercial storefront and insured [the plaintiff] against damage to non-plant business property . . . .” The Court went on to reason that if common sense dictates that a policy written for a marijuana growing business cover the plants, it also is logical that the marijuana-specific application would obtain detailed information about the plants. “The fact that [the defendant] never sought details about [the plaintiff’s] grow operation further refutes any contention that [the plaintiff’s] expectations that the Policy would cover its growing plants was a reasonable one.”

While the defendant conceded that harvested flowers and buds were otherwise covered as “Stock”, the defendant nevertheless sought to exclude coverage for this remaining portion of the loss that was otherwise covered. The defendant argued that coverage was barred by public policy as well as an exclusion for “Contraband, or property in the course of illegal transportation or trade”. Id. “The Court accepts [the defendant’s] observation that the possession of marijuana for distribution purposes continues to constitute a federal crime . . . .” However, “as the parties are well-aware, the nominal federal prohibition against possession of marijuana conceals a far more nuanced (and perhaps even erratic) expression of federal Policy.” Id. (recognizing public statements made by federal authorities reflecting an ambivalence towards enforcement where possession and distribution of marijuana is consistent with well-regulated state law). On this basis, the Court found “the Policy’s ‘Contraband’ exclusion is rendered ambiguous by the difference between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.”

The Court further found that just as the evidence including the policy application weighed in favor of a finding of no coverage for growing plants, the evidence also suggested that they intended to include coverage for harvested plants in the plaintiff’s inventory. Id. at *9. Furthermore, “it is undisputed that, before entering into the contract of insurance, [the defendant] knew that [the plaintiff] was operating a medical marijuana business.” Likewise, it knew or should have known that federal law prohibited such a business. Id. Despite this knowledge, the defendant issued a policy to the plaintiff which provided coverage for inventory of medical marijuana. “Nothing in the record ever indicates that [the defendant] sought to disclaim coverage for [the plaintiff’s] inventory, much less that [the defendant] ever informed [the plaintiff] of its position that such inventory was not insurable.” On this basis, the Court found that “Contraband” exclusion to be ambiguous.

Turning to the defendant’s public policy argument, the Court declined to offer assurances to either party about the legality of engaging in certain conduct. In particular, the Court refused to respond to the defendant’s request that it provide an advisory opinion as to “whether. . . it is legal for [the defendant] to pay for damages to marijuana plants and products.” Id. at *9. Instead, the Court speculated that the defendant should have obtained such legal opinions and assurances before “embarking on the business of insuring medical marijuana operations.” In that respect, “[a]ny judgment issued by this Court will be recompense to [the plaintiff] based on [the defendant’s] failure to honor its contractual promises, not an instruction to [the defendant] to ‘pay for damages to marijuana plants and products.’”

This tension between federal and state law persists and is further demonstrated by the decision in Tracy v. USAA Casualty Insurance Company, 2012 WL 928186 (D. Hawaii Mar. 16, 2012). In that case, the District Court held that USAA did not owe a duty to reimburse its insured under a homeowners policy for stolen medical marijuana plants that she had license to grow on her property. The Court held that the plaintiff’s possession of marijuana, even for state-authorized use, violated Federal law and concluded that requiring an insurer to pay for marijuana plants is contrary to Federal law and public policy. The Court did, however, predict that the Hawaii Supreme Court would hold that a qualifying patient who was in strict compliance with the state medical marijuana laws has a lawful interest in her marijuana and thus, an insurable interest in the plants which were the subject of her insurance claim. Turning to Connecticut, where no medical marijuana cases involving insurance coverage have been reported, one might assume that a patient who was within the monthly legal allotment of 2.5 ounces would similarly have an insurable interest in her marijuana plants.

The landscape for both insurers and businesses in this area is uncertain and ever-evolving. As claim trends develop and underwriters continue to grapple with how to price these risks, premiums will be all over the map. Although Connecticut law does not require that medical marijuana consumers, producers or dispensers obtain property or general liability insurance, it does require that each production facility obtain a $2,000,000 performance bond, which can be difficult to secure. In addition to property and general liability coverage, medical marijuana production facilities are increasingly seeking directors & officers (“D&O”) insurance. Given the nature of their operations, most, if not all, production facilities are funded not by traditional bank loans, but rather by multiple individual investors. These investors often find themselves occupying board seats and as such, want the protections offered by D&O insurance. And if the decision in Green Earth is any indication as to how other courts will interpret the issue, marijuana producers will need to obtain crop insurance if they wish to insure standing and growing plants.

From a professional liability standpoint, risks to dispensaries range from traditional risks similar to those faced by the average pharmacy, to failing to validate a patient’s Connecticut Medical Marijuana Registration Certificate to issues involving interstate commerce. Physicians are not immune either and face potential liability stemming from failure to properly evaluate a patient for medical marijuana use or compliance with certain state and federal regulations. In Connecticut and most other states where medical marijuana use has been legalized, physicians do not “prescribe” medical marijuana, however. Instead, physicians only certify that a patient has a condition which qualifies them to use medical marijuana and that the potential benefits likely outweigh the health risks for a patient. This should serve to curtail physician liability resulting from medical marijuana use.

Within the last year, the need for production facilities to carry product recall coverage has become more evident. In October 2015, two Denver marijuana cultivation facilities voluntarily recalled a wide-ranging group of marijuana products over concerns they contained residues of pesticides that were not approved for use on marijuana. The recall was the third announced by the Denver Department of Environmental Health since 2014. Thus far, nearly 100,000 plants in Colorado have been quarantined over the past several years. Product recalls are expensive for businesses and are generally not covered under traditional product liability insurance.

Finally, it does not appear that health insurers doing business in Connecticut have embraced medical marijuana as a covered treatment option. According to a survey conducted by the Office of Legislative Research1, the Connecticut Insurance Department, which regulates health insurance policies in the state, indicated that it is not aware of any insurance contract language specifically referencing medical marijuana. Marijuana is not an FDA-approved drug and most health policies only provide coverage for FDA-approved drugs. When medical marijuana dispensaries were contacted in the same survey, none accepted insurance. Officials from two dispensaries also noted that insurers have refused to contract with them, citing discrepancies between state and federal law.

Until the cumbersome federal-state split over marijuana enforcement is resolved, insurers and consumers of insurance in this area will continue live in a world of uncertainty.

1State of Connecticut Office of Legislative Research, “Medical Marijuana Insurance Coverage,” Alex Reger, 2015-R-0225, October 5, 2015.