One of the more interesting businesses to emerge in recent years has been the legal marijuana industry. Because of lingering legal issues, this industry’s emergence has been accompanied by a host of complications. These complications in turn raise a number of challenges for insurers seeking to get involving in this industry. In the following guest post, Paul T. Curley takes a look at the opportunities and challenges for insurers in connection with the legal marijuana industry. Paul is a partner in the Insurance Coverage and Coverage Litigation Group at Kaufman Borgeest & Ryan LLP. I would like to thank Paul for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Paul’s article.
The legal marijuana industry is booming, and so is the need for insurance for industry participants. This article discusses some of the opportunities and challenges for insurers presented by this thriving industry.
First Of All, Is It “Cannabis” Or “Marijuana”?
Cannabis is a family of plants, and marijuana is a primary species within that family. Hemp is the other primary species. The main difference between marijuana and hemp is the level of THC: marijuana typically contains anywhere from 15-40% THC, whereas hemp contains no more than 0.3% THC, which is too low to create a psychoactive effect. Hemp also contains cannabidiol (CBD), which is used in hundreds of products (tinctures, topicals, capsules, beverages, etc.) that are marketed for the treatment of various ailments, including epilepsy, anxiety, inflammation, and sleeplessness. This article focuses on marijuana, leaving hemp and CBD-infused products for another day.[i]
So, What Are The Opportunities?
As of this writing, 33 states and the District of Columbia have passed laws legalizing marijuana in some form. DC and 10 of the states have legalized marijuana for both medicinal and recreational (aka adult) use. The other 23 states allow only for medical use under various circumstances. It is anticipated that 2019 will see more states legalize marijuana.
Increased legalization has resulted in soaring marijuana sales, the creation of new businesses, and tremendous job growth. According to recent reports:
- in 2018, legal marijuana sales increased 34% in the U.S. to $10.8 billion;
- sales are forecast to grow to $24 billion by 2021;
- the legal marijuana industry now provides more than 211,000 full-time jobs, up from 120,000 in 2017; and
- in 2017, there were as many as 28,000 marijuana-related businesses in the U.S.
Generally speaking, companies in the marijuana industry can be separated into two categories: plant-touching and ancillary. Plant-touching companies actually handle marijuana and include cultivators (aka growers), distributors, laboratories, extractors, processors, product manufacturers, and dispensaries (i.e., retail stores). Ancillary companies, which do not handle marijuana, support the plant-touching businesses and provide products and services such as grow equipment, greenhouses, extraction equipment, consumption devices, bottling, packaging, branding, compliance, consulting, physical security, point-of-sale software, transportation, and media.
As more and more states legalize marijuana in some fashion, the industry is undergoing rapid growth and presents a huge underwriting opportunity for insurers that offer coverages such as D&O, E&O, EPL, CGL, property, fidelity/crime, product liability, cyber, crops, and commercial auto.
Sounds Great, But What Are The Challenges?
Perhaps the first thing insurers must get comfortable with is the fact that it is illegal under federal law to use, sell or possess marijuana because it is a Schedule I drug under the Controlled Substances Act of 1970 (the CSA).
Given the illegal status of marijuana under federal law, plant-touching companies, which use, sell, and/or possess marijuana, are subject to federal criminal prosecution under the CSA. As for ancillary businesses that support the plant-touching industry, they potentially are subject to federal criminal prosecution for violations of the CSA, aiding and abetting, and money laundering.
That being said, the federal government has yet to crack-down on participants in the legal marijuana industry and, indeed, has shown a tolerance of such businesses, albeit in a somewhat conflicting fashion. For example, in 2013, former U.S. Attorney General James Comey issued a memo (the Cole Memo) that urged federal prosecutors to refrain from targeting state-legal marijuana operations. However, in 2018, then U.S. Attorney General Jeff Sessions rescinded the Cole Memo. Also, in February 2019, President Trump signed a federal budget that contains an amendment that prevents the DOJ from using funds to stop states from implementing their medical marijuana laws (the so-called Rohrabacher-Blumenauer Amendment). In signing the budget, however, Trump added a statement that advised that “I will treat [the Rohrabacher-Blumenauer Amendment] consistently with my constitutional responsibility to take care that the laws be faithfully executed.”
Besides potential federal criminal prosecution of industry participants, other underwriting concerns include product liability claims (which have been made against cultivators and dispensaries), lack of banking opportunities for plant-touching businesses (federally chartered banks are reluctant to accept cash from a business that is illegal under federal law), the prevalence of large amounts of cash (given the lack of banking relationships), crop/inventory theft or damage, business interruption (wildfires, for example, can destroy a crop and disrupt the whole chain of distribution), cyber threats to customers’ personal information (especially medical marijuana dispensaries that store customers’ medical data), claims by disgruntled investors (including crowd funders, private equity, and venture capital), extensive regulatory compliance, RICO claims by property owners against cultivators and distributors alleging decreased property values from odors, the lack of claims data, and the absence of a robust body of case law addressing coverage under marijuana insurance policies.
Speaking Of Case Law, What Do Courts Think Of Marijuana Insurance?
Considering the legal marijuana industry is relatively young, it’s not surprising that there are few coverage decisions. And, as discussed below, they are a mixed bag.
In Tracy v. USAA Cas. Ins. Co., No. 11-00487, 2012 U.S. Dist. LEXIS 35913 (D. Haw. Mar. 16, 2012), plaintiff was a homeowner who grew marijuana at home for her personal medical use as allowed under Hawaii’s medical marijuana law. Someone stole her plants and she filed a claim under her homeowners insurance policy, which the insurer denied. In siding with the insurer, the Court held that, even if the policy covers plaintiff’s medical marijuana plants, the “Court cannot enforce the [insurance policy] because Plaintiff’s 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, as reflected in the CSA, Gonzales [a U.S. Supreme Court decision], and its progeny.” Id. at *39.
A few years later, however, a federal court in Colorado reached the opposite conclusion in Green Earth Wellness Ctr., LLC v. Atain Specialty Ins. Co., 163 F. Supp. 3d 821 (D. Col. Feb. 17, 2016). Green Earth ran a legal grow operation and dispensary. Smoke and ash from a wildfire damaged both its potted plants and its harvested buds.[ii] Green Earth submitted a claim under its commercial property and general liability policy, and the insurer denied the claim. The Court first addressed coverage for the potted plants, noting that the policy provided coverage for “Stock,” which includes raw materials, but excludes coverage for “growing crops.” The Court held that even if the potted plants could be considered raw materials, they nonetheless also were growing crops and therefore excluded from coverage.
The Court next addressed the harvested buds, which the parties agreed were “finished product” and therefore covered Stock. The insurer, however, argued that coverage for the buds was barred (i) by an exclusion for Contraband and (ii) as against public policy. The Court disagreed.
First, the Court found that the Contraband exclusion was ambiguous and that extrinsic evidence compelled the conclusion that the parties shared a mutual intention that the policy would insure Green Earth’s inventory and that the Contraband exclusion would not apply to it. In finding the exclusion ambiguous, the Court noted that “federal authorities had made public statements that reflected an ambivalence towards enforcement of the Controlled Substances Act in circumstances where a person or entity’s possession and distribution of marijuana was consistent with well-regulated state law.” Id. at 833. The Court held that “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.” Id.
Second, for the same reasons the Court found the Contraband exclusion ambiguous, “and particularly in light of several additional years evidencing a continued erosion of any clear and consistent federal public policy in this area,” the Court declined to declare the policy void on public policy grounds and, in doing so, explicitly rejected Tracy.
Finally, in K.V.G. Props., Inc. v. Westfield Ins. Co., 900 F.3d 818 (6th Cir. 2018), the Court found the application of a criminal/dishonest acts exclusion to be a close call but ultimately found it barred coverage. KVG is a commercial landlord and rented properties to a tenant who, unbeknownst to KVG, used them to grow marijuana. The tenant surreptitiously made alterations to the property, causing about $500,000 in damages. Eventually, the DEA raided the properties, KVG evicted the tenants, and KVG made a claim under its commercial property policy for the damages, which the insurer denied. In a straight forward fashion, the District Court found that coverage was precluded by the criminal/dishonest acts exclusion. The Court of Appeals, however, took a more nuanced approached, noting that “whether the tenants committed a ‘criminal act’ within the meaning of the policy . . . is an interesting question” considering the conflict between federal law and Michigan law, which, at the time, allowed for medical marijuana (and now also allows for recreational marijuana). Id. at 821. The Court of Appeals advised that “we 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.” Id. at 822. The problem for KVG, however, was that there was no evidence in the record that its tenants were growing marijuana in compliance with Michigan law. Indeed, in the eviction proceedings, KVG argued the exact opposite. Accordingly, the Court of Appeals found the criminal/dishonest acts exclusion barred coverage but noted that “[u]nder different circumstances, KVG might have a strong federalism argument in favor of coverage.” Id. at 821-22.
To recap the coverage decisions: one found it would be against public policy to cover the claim (Tracy), one rejected application of a Contraband exclusion and a public policy argument (Green Earth), and one upheld application of a criminal/dishonest acts exclusion but very well could have rejected the coverage defense if the grow operation had been legal under state law (KVG). It seems fair to say that this limited and conflicting case law offers little guidance to both insurers and insureds.
While approximately 25 insurers (mostly nonadmitted) offer coverage to industry participants, most major insurers have opted out, with federal illegality being the main stumbling block. If and when the federal government officially allows for the use, sale and possession of marijuana, it is expected that many more insurers will join the market. That day may not be too far off, given the numerous bills recently introduced into Congress that seek to address the issue by, for example, removing cannabis from Schedule I of the CSA, prohibiting federal prosecution, and/or leaving it up to the states to decide. Until then, however, it seems most insurers will continue to monitor the situation and maintain a wait and see approach.
[i] And they deserve additional discussion given the recent passage of the 2018 Farm Bill, which drastically changed hemp policy in the United States, allowing for greatly expanded hemp cultivation and creating exceptions to CBD’s Schedule I status (so that CBD products may be sold legally in interstate commerce). The hemp and CBD industries are expected to enjoy tremendous growth as a result of the 2018 Farm Bill – presenting additional opportunities and challenges for insurers.
[ii] The potted plants included “mother plants” and “clones.” As explained by the Court, mother plants “are plants of each individual strain of marijuana that Green Earth offers. Mother plants are not cultivated to produce useable marijuana on their own; rather, they are maintained by the grower solely for the purpose of producing a constant and reliable supply of genetically-identical ‘clones.’ A clone is a portion of the mother plant that is cut off and planted in a growing medium until it produces its own root, becoming a viable marijuana plant in its own right. The clones then grow to maturity. . . . At the appropriate time, the grower harvests the flowering clone, cutting off flowers and buds (and sometimes other portions of the plants), drying that material, and selling it.” Id. at 826.