Believe it or not, cannabis companies have been embroiled in insurance coverage cases for 20 years now. Sometimes the federal illegality of the business is the issue, despite the insurance company taking premiums for the activities, and other times it is the run-of-the-mill application of exclusions and endorsements that negate coverage. This article summarizes the issues with a survey of notable cases to date.
Both hemp and policy nerds can rejoice in this case. In Bogard v. Cty. Mut. Ins. Co., No. 1:19-CV-00705-AA, 2021 WL 4269991, at *5 (D. Or. Sept. 20, 2021), a fire occurred in the home of the insured while he was manufacturing a hemp salve in Oregon in 2017. The insurer denied the claim based on the controlled substances exclusion because the total THC of one of the harvests was .381% and therefore marijuana. The court was faced with squaring Oregon hemp law before the 2018 Farm Bill with federal law, which had not yet distinguished between hemp and marijuana, with two different standards for measuring total THC in a substance involving two harvests. At issue was whether THCA should be included in the calculation. Testing from the 2017 harvest showed compliant levels of delta-9 THC, but .435% THCA using the Oregon regulation, and when multiplied by .877 and added to the calculation, the total THC became .381%. The 2018 Harvest delta-9 THC was .0365%, the THCA was .254%, resulting in a total THC of .259%. No lawyer likes to do math, so the court held that because the insurance policy did not reference Oregon’s standards for total THC calculation, the simple, later-adopted U.S. Farm Bill definition of hemp as containing less than .3% THC by dry weight applied, and therefore the substance was hemp and not a controlled substance:
The federal regulatory standards did not yet exist at the time of the loss or when Defendant denied Plaintiffs’ claim and are not referenced or incorporated into the Policy. Rather, the Policy references only 21 U.S.C. §§ 811 and 812, and those statutes, by further reference to 7 U.S.C. § 1639o(1), define hemp as cannabis containing 0.3% or less “delta-9 tetrahydrocannabinol” by dry weight. By the strictest reading of the statutes’ plain terms, this might exclude THCA from consideration entirely. At best, it is ambiguous about whether THCA should be considered. And if THCA is to be considered, the statutes themselves provide no standard for converting THCA to delta-9 THC by decarboxylation.
Id. at *5.
In Am. Fam. Mut. Ins. Co., S.I. v. Big Bush Farms LLC, the court evaluated whether there was a duty to defend an insured in a lawsuit alleging breach of contract, conversion, and unjust enrichment resulting from a failed business deal involving faulty seeds which caused a lower yield of industrial hemp. See No. 6:19-CV-1725-MK, 2020 WL 6038048, at *1 (D. Or. Apr. 7, 2020). The insurer refused to defend, citing the exclusion to the definition of “property damage” for “physical injury to marijuana or cannabis plants … even if legal in your state.” The insurer argued that hemp is cannabis and therefore excluded. The insured cleverly pointed out that no physical damage to cannabis plants was alleged, rather, due to the low yield from the bad seeds, the plaintiff was deprived of the possession of the hemp and the resultant harm from the “loss of use of tangible property,” which is included in the definition of “property damage.” Unfortunately, the court held that because the policy excludes coverage for physical injury to cannabis plants, the loss of use coverage for those plants was also excluded.
Are butane fires covered causes of loss? It depends on the policy, but in Laber v. Nationwide Prop. & Cas. Ins. Co., the insurer successfully relied on a residential exclusion for “increased hazard,” which was defined as any loss occurring “while a hazard is increased by a means within the control and knowledge of the insured.” See No. 118CV00420MSMPAS, 2020 WL 555247, at *1 (D.R.I. Feb. 4, 2020). The court explained that the actions of the insured in manufacturing hash with butane in his home was an increase in hazard, thus the significant claim for destruction of three apartment buildings was denied. In Kinsale Ins. Co. v. JDBC Holdings, Inc., the insurer sought rescission of the insurance policy after a chemical fire resulting from hemp manufacturing occurred, due to several exclusions, one being the “procedural safeguard” endorsement concerning theft. See No. 3:20-CV-8, 2021 WL 2773002, at *1 (N.D.W. Va. Mar. 31, 2021). This endorsement provides that if certain protective equipment were not installed by the insured, the policy is terminated. The court disregarded this endorsement as inapplicable because it only pertained to theft. The insurer argued that coverage will not issue when there is a misrepresentation on the insurance application, which the insurer argued fell under the “concealment, misrepresentation, or fraud” exclusion. When the insured applied for coverage, they wrote the sprinklers were “being installed,” when installation had not begun yet and still was not completed at the time of the fire. The court held that because the insured admitted the sprinklers were only being installed and the insurer accepted the coverage and took the premium, the insurer had a duty to pay the claim.
JDBC Holdings, Inc. also dealt with the pollution exclusion, which the insurer argued also barred coverage of the claim because the chemicals exuded from the fire constituted seepage of smoke from a hazardous substance. The court disagreed, holding smoke damage is a covered loss under the policy, and, to the extent this is ambiguous, it had to be resolved in favor of the insured. The court also admonished that, “an exclusion in a general business liability policy should not be so construed as to ‘strip the insured of protection against risks incurred in the normal operation of his business,’ especially when the insurer was aware of the nature of the insured’s normal operations when the policy was sold.” Throwing out multiple possible bases to deny coverage, even if not the one originally relied upon by the insurer, is extremely common.
Very similar facts and holding can also be found in the Nationwide Mut. Fire Ins. Co. v. McDermott case. See 603 F. App’x 374 (6th Cir. 2015). In that case, the court held that the failure to notify the insurance company of butane marijuana extraction in a house’s basement, which later burned down due to that activity, voided the coverage because the insured knowingly omitted a material fact about a change in use of the policy as required by an endorsement. The court also referenced the increased hazard and intentional acts exclusions to deny coverage and held that the conversion of the basement into a marijuana extraction business created liability for the insurance carrier that it did not assume.
In Barnett v. State Farm Gen. Ins. Co., 200 Cal. App. 4th 536, 539, 132 Cal. Rptr. 3d 742, 744 (2011), the insured sought coverage for marijuana plants seized and destroyed by police. The policy did not define “theft” or “stolen.” But, the court held these terms have well-understood meanings. Coverage depended on the interpretation of the nature of the theft, and the court noted that theft must include an intent to steal the property. Because the insured could not show that the police intended to steal the marijuana, the court held no theft occurred. Moreover, the court held the insured was not entitled to get the marijuana back, especially once the insured was charged criminally in the matter for having too many plants. In Tracy v. USAA Cas. Ins. Co., a Hawaii caregiver sought coverage for stolen marijuana plants owner her homeowners’ policy. See Tracy v. USAA Cas. Ins. Co., No. CIV. 11-00487 LEK, 2012 WL 928186, at *13 (D. Haw. Mar. 16, 2012). Though the court noted that her having too many plants might void coverage under state law and that the insured had an insurable interest in the plants, it concluded there was no coverage because marijuana is still a Schedule One, federally illegal plant, rendering the policy void against federal law and policy. The policy’s exclusion stated there was no coverage for claims relating to the use, sale, manufacture, or delivery of marijuana.
In Green Earth Wellness Ctr., LLC v. Atain Specialty Ins. Co., 163 F. Supp. 3d 821, 823 (D. Colo. 2016), the insured sought coverage following a nearby wildfire, contending the smoke had damaged mother plants, flower plants, veg plants, clones, and finished product. The insured believed the plants would be covered under “stock,” meaning: “merchandise held in storage or for sale, raw materials, and in-process or finished goods.” Because the defined term “raw material” was ambiguous under the policy, it was construed in favor of the insured here. However, the court ruled that the “growing crops” exclusion negated coverage. At issue were whether the various life cycles of plants were considered growing crops because the plants were potted rather than free-standing attached to the earth. The court held that growing crops include mother plants and clones.
In Bowers v. Farmers Ins. Exch., the insured sued its insurer for refusing to pay a claim under the landlord’s insurance policy for mold damage caused by the destruction caused by a basement marijuana grower, of which the landlord was not aware. See Bowers v. Farmers Ins. Exch., 99 Wash. App. 41, 991 P.2d 734 (2000), as amended on reconsideration (Mar. 7, 2000). The court denied coverage on the basis that the tenant’s actions in the basement constituted vandalism, which is an excluded loss in the policy, and that tenant’s actions were the proximate cause of the loss.
This survey is but a smattering of the coverage issues presented by cannabis businesses. Other common exclusions are a violation of ordinance or law, contraband, outdoor plants, criminal acts, employee dishonesty, health hazard, vaping, fungus, RICO, intoxication. The exclusions discussed by the cases in this paper include controlled substances, cannabis/hemp/marijuana plants, procedural safeguards, increased hazard, intentional acts, concealment/misrepresentation/fraud, pollution, void against federal law/policy; sale/manufacture/delivery of marijuana, growing plants, vandalism, and mold. Some policies will contain endorsements or exclusions for certain products, like tea or coffee, for example, when those are common substances infused with hemp CBD. It is therefore necessary to comb every page of the policy to assess whether it is the right one for you – the insured will be held to have known what they agreed to in accepting the policy language in the insurance contract.