The lack of uniform cannabis laws creates some coverage confusion for insurers.
Marijuana is currently legal in varying degrees in 29 states and the District of Columbia, with legalization pending in two additional states. Attempts to legalize marijuana failed in 2017 in 13 states, as it is still federally illegal as a Schedule 1 controlled substance.
Illegal to possess or use under federal law
A Schedule 1 controlled substance is illegal to possess or use under federal law. As it has historically been illegal, growing and selling marijuana operations have been considered uninsurable due to general policy provisions excluding coverage for illegal activities, or the public policy against insuring illegal actions.
According to the McCarran Ferguson Act, though, regulation of insurance is to be left to the individual states. Most state statutes that legalize marijuana expressly grant an insurable interest in marijuana up to the legal quantity. Since recreational use of marijuana is currently legal in eight states plus Washington, D.C., those state statutes can legalize insuring marijuana. The laws are not uniform across the states where medical or recreational marijuana is legal, and this becomes a confusing issue for both policyholders and insurers.
Making a case for coverage
This increase in legalization has created a new realm of coverage issues for insurers that are willing to insure marijuana risks. One of those known coverage issues is that of currency. Since marijuana is still federally considered a Schedule 1 controlled substance, and banks are federally insured through the FDIC, banks are required to function under the current federal laws. One such law prohibits banks from accepting money that is suspected to be associated with the illegal drug market.
As a result of these laws, it’s estimated that about 70% of businesses participating in the flourishing marijuana industry do not have a bank account.
One example of how the banks not accepting marijuana money affects the insurance industry arose in a case a few years ago. In an attempt to get the bank to accept the money the insured had collected from his marijuana business, the insured washed his drug money in his washing machine, and then transferred the money to his dryer. During the drying cycle, the dryer exploded. The insured then filed a claim with his insurance company under his homeowners policy.
A claim like this cannot be denied simply because the insured was in a federally illegal business. The insured in this case wasn’t doing anything illegal at the time, he was just doing something reckless, but by paying out this claim, an insurer may be guilty of aiding and abetting in the use of marijuana, and perhaps conspiring to violate federal law under the federal Controlled Substances Act. The banking issue is just one that increases risk for insurers in the marijuana field.
Theft & vandalism
Two of the largest areas where insureds expect coverage for marijuana losses, or due to marijuana activity, are theft and vandalism. In a case called Bowers v. Farmers Insurance Exchange, Farmers Insurance Exchange denied the insured landlord coverage for mold damage to a rental house.
The damage occurred when the tenants converted the house into a marijuana growing operation. The marijuana cultivation caused damage to the house, including mold growth. The landlord filed an action against Farmers for refusing her claim. The trial court found in favor of Farmers.
The insured landlord appealed and contended that the purpose of her policy was to insure from accidental loss to the rental property, and as far as she was concerned, the damage was accidental. Farmers argued that the damage was from mold, which was excluded under the policy, and not vandalism, which was covered under the policy. The court determined that the tenants’ acts constituted vandalism and the insured landlord won the case. The case is Bowers v. Farmers Ins. Exch. 99 Wash. App. 41, 991 P.2d 734 (2000).
USAA homeowners’ claim denial
In one of the most well-known marijuana and insurance law cases, Tracy v. USAA Cas. Ins. Co., USAA issued a homeowners policy to Barbara Tracy, a medical marijuana patient permitted under Hawaiian law to possess and grow her own marijuana. After a thief stole 12 marijuana plants, valued at approximately $45,600 from Tracy’s property, she filed a claim with USAA. USAA denied the claim, and Tracy sued them for breach of contract.
USAA contended that Tracy did not have an insurable interest in the plants. Hawaiian law defined an insurable interest to be any “lawful and substantial economic interest in the safety or preservation of the subject of the insurance.” USAA argued that any interest in marijuana is not lawful, as Hawaii’s medical marijuana law at the time did not legalize the use of marijuana, it simply provided an affirmative defense for marijuana-related crimes.
Unenforceable illegal contract?
USAA had a policy provision covering theft of “trees, shrubs and other plants,” which Tracy argued should also cover her marijuana plants. USAA also argued that it could not purchase medical marijuana using insurance proceeds, as that violates federal law. The court agreed with USAA, concluding that Tracy’s possession and use of marijuana violated federal law, despite compliance with the state law. The court also stated that the insurance policy that was supposed to cover her marijuana was an unenforceable illegal contract. This case is Tracy v. USAA Cas. Ins. Co., No. 11-00487 LEK-KSC, 2012 U.S. Dist. LEXIS 35913 (D. Haw. Mar. 16, 2012)
Due to its illicit nature, marijuana historically has not been covered by insurance; therefore, few cases involving marijuana and insurance have made it to the high levels of litigation. We can be sure that with the growing legalization of the drug, more court cases and insurance disputes will soon follow.
Hannah Smith (firstname.lastname@example.org) is an editor with FC&S Online, the authority on insurance coverage interpretation and analysis for the P&C industry. It is the resource agents, brokers, risk managers, underwriters, and adjusters rely on to research commercial and personal lines coverage issues.