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January 17, 2019 Article

If You’re Selling, Some Considerations Regarding Cannabis

With a growing list of jurisdictions having decriminalized certain uses of marijuana, some of the states involved have recognized insurance gaps and encouraged insurers to develop and offer tailored coverage

by Kristin A. Ingulsrud and Marc J. Shrake[1]

The recent midterm elections added several states to the growing list of jurisdictions that have decriminalized certain uses of marijuana. This time around, it’s Michigan, Missouri, and Utah. Some of the states leading the latest decriminalization movement have recognized insurance gaps facing the cannabis industry and, in response, have encouraged commercial sellers of insurance to develop and offer tailored coverage.

For this edition of Coverage, this article presents some thoughts for insurance companies regarding the cannabis industry, and it is intended as a companion piece to this edition’s “Budding Considerations: Cannabis-Related Insurance Issues” by Amy Elizabeth Stewart and Katie Glenn.

In California, Insurance Commissioner Dave Jones approved the Cannabis Business Owners Policy (CannaBOP) in June 2018. The new CannaBOP program is designed for cannabis dispensaries, storage facilities, processors, manufacturers, distributors, and other related businesses. The CannaBOP program includes property and liability coverage for qualifying businesses.

Other recent insurance offerings to the California cannabis industry include the first commercial insurance from an admitted carrier (November 2017), the first surety bond program (February 2018), the first coverage for commercial landlords (May 2018), and a product liability and product recall program (May 2018). These offerings followed a 2017 initiative by the California Department of Insurance to encourage commercial insurers to fill perceived coverage gaps in the cannabis industry.

Meanwhile, New York lawmakers have introduced a bill that would deem medical marijuana a prescription drug, covered drug, or health care service in order to authorize its coverage under health insurance programs.[2]

Even with these developments, however, state legislatures and agencies may be affected by constitutional, political, and cultural factors in the guidance they can offer the cannabis industry when it comes to insurance. An understanding of case law, therefore, is necessary for fair and informed decisions on cannabis-related claims under existing policies. And those working on developing insurance products for the burgeoning cannabis industry can refer to the decisions to learn the emerging questions for, and how such questions are approached by, parties to the insurance contract and the decision makers called upon to resolve those questions.

Marijuana Is Illegal

One major question is whether and, if so, how an insurance policy applies to illegal acts. Businesses and individuals seeking insurance coverage for cannabis-related claims and losses will seek to cultivate uncertainty over the legality of marijuana growing, transport, sale, and use to try to avoid denials based on public policy or policy exclusions for illegal acts.

The U.S. Constitution’s Supremacy Clause dictates that federal law is the “supreme Law of the land.”[3] And the Commerce Clause grants Congress the power to regulate the channels of interstate commerce, which includes virtually anything it wishes to touch.[4] State laws are therefore vulnerable to preemption if they conflict with federal law.[5]

In 1970, Congress passed the federal Controlled Substances Act, a comprehensive statutory scheme that, among other things, outlaws the manufacture, distribution, or possession of marijuana in the United States.[6] It is still the law of the land.

In 1996, California voters passed the Compassionate Use Act,[7] a state statute generally prohibiting the sale or possession of marijuana. But the Compassionate Use Act creates an exemption from criminal prosecution for marijuana possession under certain circumstances involving approval by a physician.[8]

To test whether the federal Controlled Substances Act went beyond the scope of the Commerce Clause, two California individuals who used physician-recommended marijuana brought an action in the U.S. District Court for the Northern District of California seeking to prohibit the federal government from enforcing the Controlled Substances Act to the extent it prevented the two individuals from personal medical use of marijuana.[9] They argued the Controlled Substances Act as applied to them exceeded the federal government’s authority under the Commerce Clause.[10] One plaintiff cultivated her own marijuana and ingested it only at home under the recommendation of her physician, which fell squarely within the exemption in the California Compassionate Use Act.[11] The other plaintiff was unable to cultivate her own marijuana and relied on two caregivers to provide locally grown marijuana to her (which also fell within the Compassionate Use Act’s exemption).[12]

Relying on its seminal 1942 decision in Wickard v. Filburn, the U.S. Supreme Court held that the Controlled Substances Act is a valid exercise of Congress’s power to regulate interstate commerce. In Wickard, a farmer sowed wheat in excess of federal regulations that limited the volume of wheat in interstate commerce.[13] The farmer argued his excess crop was intended only for use on his own farm, entirely outside the stream of interstate commerce, and therefore was not subject to federal government control under the Commerce Clause.[14] Wickard holds that Congress can regulate even purely intrastate activity if Congress concludes that failure to regulate that class of activity will undercut the regulation of the interstate market.[15]

Applying this analysis to the use of medical marijuana under the California Compassionate Use Act, the Supreme Court held that Congress has the power to regulate local activities if they are part of an economic “class of activities” that have a substantial effect on interstate commerce.[16] Therefore, application of the Controlled Substances Act to criminalize the plaintiffs’ use is a valid exercise of the Commerce Clause.[17]

Under the concept of anti-commandeering, the federal government cannot force states to enforce federal statutes, although it can encourage states to adopt regulations through the spending power.[18] Anti-commandeering derives from the Tenth Amendment, which underscores a foundational constitutional principle that powers not expressly delegated to the federal government are reserved to the states.

The Supreme Court applied the concept of anti-commandeering in its recent decision in Murphy v. National Collegiate Athletic Association: The Court upheld New Jersey’s law decriminalizing sports gambling and ruled unconstitutional the federal Professional and Amateur Sports Protection Act of 1992, which prohibited states from legalizing sports betting.[19] Murphy holds that while the federal government may prohibit sports betting, it may not force states to do so.[20]

Insurance Products for the Cannabis Industry Will Likely Be Enforced

Insurance products continue to be designed for the cannabis industry and its federally outlawed activities.

An “illegal” contract is generally unenforceable. Aside from estoppel principles, the insurance contract’s unique role in society affords it increased deference. The relatively easy case is the decision in Medina v. Safe-Guard Products, in which the court enforced an insurance contract that was actually illegal because the insurance company had failed to obtain the required licenses.[21] There the insured was an innocent consumer and did not suffer any injury as a result of the insurer’s illegal licensing status.

It also appears that insurance contracts designed for the cannabis industry will probably be enforced. If both the insurer and the insured are aware that the insurance policy is designed to cover claims or losses arising out of a cannabis-related activity, courts may very well enforce the insurance contract and also not permit the insurance company to rely on an illegal acts exclusion to deny coverage. For instance, the decision in Green Earth Wellness Center, LLC v. Atain Specialty Insurance Co. by the U.S. District Court for the District of Colorado holds that damaged and stolen cannabis plants are covered under the insurance policy when the insurance company enters into the insurance contract with full knowledge of the insured’s business activities.[22]

Other, non-insurance contracts and regulations have been enforced within the cannabis industry. In Green Cross Medical, Inc. v. Gally, a landlord attempted to revoke the lease of its medical marijuana dispensary tenant.[23] Although the landlord entered into the lease with full knowledge of the type of business the prospective tenant operated, it later argued that the lease was void for illegality.[24] The Arizona Court of Appeals recognized that use of marijuana even for medical purposes is illegal under federal law.[25] However, it noted that contracts that concern illegal objects may be enforced in a way that does not require illegal conduct.[26] The court considered whether voiding the contract would result in unjust enrichment, windfalls, and deterrence of illegal conduct.[27] The court upheld the lease, citing Colorado’s Green Earth case and noting that both parties had entered into the lease agreement with knowledge of the tenant’s intended business activities.[28]

Insurance Products Not for the Cannabis Industry Might Not Be Enforced

When the insurance company issues an insurance policy not knowing or suspecting that a claim or loss arising from cannabis-related activity is part of the bargain, the case law supports application of the exclusion for illegal acts.

In Tracy v. USAA Casualty Insurance Co., the District Court of Hawaii considered whether a homeowner’s property insurance coverage protected marijuana plants stolen from a residential property.[29] As a homeowner’s policy, the insurance contract provided no indication that the insurer knew about the homeowner’s personal marijuana plants. While noting the insured had an insurable interest in the plants,[30] the court held there was no coverage because the cultivation of marijuana, while authorized under Hawaii law, violates federal law and enforcement of the insurance policy is contrary to public policy.[31]

Adopting the District Court of Hawaii’s reasoning, the District Court of New Mexico ruled in Hemphill v. Liberty Mutual Insurance Co. that an insurer is not required to cover medical marijuana as part of its insured’s medical expenses.[32] The court determined that future medical expenses under an automobile policy do not include medical marijuana because its use conflicts with federal law.[33]

In K.V.G. Properties, Inc. v. Westfield Insurance Co., the Sixth Circuit Court of Appeals affirmed summary judgment granted by the Eastern District of Michigan holding that an all-risk commercial property insurance policy does not provide coverage for property damage arising out of marijuana cultivation.[34] K.V.G. managed a commercial building.[35] Its commercial tenants were caught growing marijuana inside the space they rented.[36] Their operations caused nearly half a million dollars in damage to K.V.G.’s property.[37] The property insurance company denied coverage based on the policy exclusion that precluded coverage for loss or damage caused by any “[d]ishonest or criminal act by you, any of your partners, members, officers, managers, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose.”[38]

The insurance company contended that the tenants’ conduct was criminal under either state or federal law and was the main cause of the property damage, thereby falling within the policy exclusion for illegal or dishonest acts.[39] The Sixth Circuit acknowledged the existing conflict between federal law and Michigan state law, which permitted cultivation under limited circumstances, and concluded the property owner had failed to show that the tenants’ marijuana cultivation complied with Michigan law.[40] Therefore, the insurance company correctly and lawfully denied coverage under the policy.[41]

The Sixth Circuit did acknowledge that the Michigan Medical Marijuana Act demonstrates the intent of Michigan’s citizens and should therefore be afforded great weight.[42] The court also “would hesitate before reading a Michigan insurance policy to bar coverage for a ‘criminal act’ when Michigan law confers criminal and civil immunity for the conduct at issue.”[43] The Michigan statute in question also declares that a person lawfully cultivating medical marijuana shall not be “denied any right or privilege” under state law.[44] But an insurance policy does not provide coverage for conduct that, based on the evidence, is illegal under both state and federal law.[45]

Approach Hazy Coverage Questions from the Source of the Smoke

While insurance products for the cannabis industry are being developed, the analysis of cannabis-related claims under existing insurance policies requires, as usual, an understanding of the insurance contract and the evidence regarding the loss or the claim. Courts in states with progressive marijuana laws may apply a narrow construction of a policy’s illegal or dishonest acts exclusion to marijuana-related claims. It is also expected that insurers that are aware of their insureds’ cannabis-related activity when the policy is sold may not be able to rely on the illegal or dishonest acts exclusions.

The legal landscape for insurance and cannabis is still developing (as are the industry itself and the contracts that will govern it), and there will be many exciting issues of first impression.

Kristin A. Ingulsrud and Marc J. Shrake are with Freeman Mathis & Gary, LLP, in Los Angeles, California.


[1] Kristin A. Ingulsrud is an associate and Marc J. Shrake is a partner with the law firm of Freeman Mathis & Gary, LLP, and they both practice out of the firm’s Los Angeles office.

[2] State Assemb. B. A11390, 2018 Assemb. (N.Y. 2018).

[3] U.S. Const. art. VI, cl. 2.

[4] U.S. Const. art. I, § 8, cl. 3.

[5] See, e.g., Marbury v. Madison, 5 U.S. 137 (1803).

[6] 21 U.S.C.S. §§ 801–904 (LexisNexis 2018).

[7] Cal. Health & Safety Code § 11362.5.

[8] Cal. Health & Safety Code § 11362.5.

[9] Gonzales v. Raich, 545 U.S. 1 (2005).

[10] Gonzales, 545 U.S. at 15.

[11] Gonzales, 545 U.S. at 6–7.

[12] Gonzales, 545 U.S. at 6–7.

[13] Wickard v. Filburn, 317 U.S. 111 (1942).

[14] Wickard, 317 U.S. at 119.

[15] Wickard, 317 U.S. at 125.

[16] Gonzales, 545 U.S. at 17 (citing Perez v. United States, 402 U.S. 146, 151 (1971)).

[17] Gonzales, 545 U.S. 1.

[18] New York v. United States, 505 U.S. 144, 149 (1992).

[19] Murphy v. Nat’l Collegiate Athletic Ass’n, 138 S. Ct. 1461 (2018).

[20] Murphy, 138 S. Ct. at 1477.

[21] Medina v. Safe-Guard Prods., Int’l, Inc., 164 Cal. App. 4th 105, 108 (2008).

[22] Green Earth Wellness Ctr., LLC v. Atain Specialty Ins. Co., 163 F. Supp. 3d 821 (D. Colo. 2016).

[23] Green Cross Med., Inc. v. Gally, 242 Ariz. 293 (Ariz. Ct. App. 2017).

[24] Green Cross Medical, Inc., 242 Ariz. at 295.

[25] Green Cross Medical, Inc., 242 Ariz. at 298.

[26] Green Cross Medical, Inc., 242 Ariz. at 298.

[27] Green Cross Medical, Inc., 242 Ariz. at 298.

[28] Green Cross Medical, Inc., 242 Ariz. at 300 (citing Green Earth Wellness Ctr., LLC v. Atain Specialty Ins. Co., 163 F. Supp. 3d 821 (D. Colo. 2016)).

[29] Tracy v. USAA Cas. Ins. Co., No. 11-00487 LEK-KSC, 2012 U.S. Dist. LEXIS 35913 (D. Haw. Mar. 16, 2012).

[30] Tracy, 2012 U.S. Dist. LEXIS 35913, at *30.

[31] Tracy, 2012 U.S. Dist. LEXIS 35913, at *2.

[32] Hemphill v. Liberty Mut. Ins. Co., No. CV 10-0861 LH/RHS, 2013 U.S. Dist. LEXIS 200109.

[33] Hemphill, 2013 U.S. Dist. LEXIS 200109, at *6.

[34] K.V.G. Props., Inc. v. Westfield Ins. Co., 900 F.3d 818 (6th Cir. 2018).

[35] K.V.G. Properties, Inc., 900 F.3d at 820.

[36] K.V.G. Properties, Inc., 900 F.3d at 820.

[37] K.V.G. Properties, Inc., 900 F.3d at 820.

[38] K.V.G. Properties, Inc., 900 F.3d at 820.

[39] K.V.G. Properties, Inc., 900 F.3d at 821.

[40] K.V.G. Properties, Inc., 900 F.3d at 822.

[41] K.V.G. Properties, Inc., 900 F.3d at 823.

[42] K.V.G. Properties, Inc., 900 F.3d at 821–23.

[43] K.V.G. Properties, Inc., 900 F.3d at 822.

[44] Mich. Comp. Laws § 333.26424(b).

[45] K.V.G. Properties, Inc., 900 F.3d at 821–22.

Copyright © 2019, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).