How could I not write a post about this one? Growing, possession, sale, etc. of marijuana, as you may have heard, is illegal under federal law. Conversely, an increasing number of states have made it legal, at least for certain uses. New York is in the midst of implementing a temporary law that made use of medical marijuana legal.
Two states and the District of Columbia have legalized marijuana for its, um, traditional use. In Colorado, you can buy it in stores, not on street corners. This is the sort of use that Congress had in mind when it prohibited marijuana back in the 1930’s. Consequently, the U.S. has a classic federal-vs.-state conflict when it comes to the regulation of this substance.
This comes back to insurance. (Repeat after me: All things come back to insurance.) Property insurance policies do not cover “contraband.” “Contraband” refers to goods prohibited by law. Marijuana certainly seems to fit that definition, at least if one is referring to federal law. Suppose, though, that the insurance and the property are in a state that has taken a more tolerant legal attitude? Does the insurance cover it then?
A federal district court in Colorado decided this question two weeks ago, and it said, “Yes.”
The plaintiff was a medical marijuana retailer in Colorado Springs. It has a growing facility adjacent to its store. It bought a commercial package policy from a surplus lines carrier, effective June 29, 2012. At around the same time, a wildfire started near Colorado Springs. It did not damage the store’s buildings. However, the retailer claimed that smoke and ash overwhelmed its ventilation system. The resulting lack of ventilation damaged the plants.
The store filed an insurance claim in November, seeking $200,000 for growing plants and $40,000 for plants that had been harvested and were being prepared for sale. Eight months later, the insurer denied coverage, arguing that the occurrence began before the policy took effect; that the store’s claim about the date of loss was a “material misrepresentation” that voided coverage; that the insured did nothing to mitigate the loss; and the insured waited too long to give notice of the loss.
The store subsequently sued the insurer for breach of contract, bad faith and unreasonable delay with regard to this and an unrelated theft damage claim. The insurer responded that:
- The policy provision covering “stock” does not apply to growing plants
- Any coverage is limited by a “growing crops exclusion”
- The loss actually commenced before the policy took effect
- Coverage for growing or finished marijuana is subject to an exclusion for contraband
- Coverage for marijuana is a violation of public policy and void.
The court found that:
- The policy’s definition of “stock” could cover growing plants
- However, the growing crops exclusion removed all coverage for growing plants
- A trial is required to determine when the loss actually commenced
- The policy’s exclusion of coverage for contraband was ambiguous because of the difference between federal law and the federal government’s stated attitude toward enforcement in states that have legalized marijuana. Further, the “evidence strongly suggests that the parties mutually intended to include coverage for harvested plants constituting (the retailer’s) inventory.” The court noted that the insurance application asked several questions about the amount and value of the inventory. Also, the insurer knew prior to binding that the insured was in the medical marijuana business, and it chose to issue the policy anyway.
- Prior court rulings that insuring marijuana is against public policy did not apply to this case.
Based on these conclusions, the court ordered that the dispute over the claim for the finished plants should go to trial.
With New York’s medical marijuana industry in its initial stages, I think it’s a matter of time before we start to see these kinds of claims here. While a federal court decision in Colorado is not necessarily binding in New York, this decision will likely inform judges’ thought processes when similar disputes reach their courtrooms. This case gives us a preview of what we can expect as New York’s medical marijuana experiment goes forward.
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