Marijuana and insurance policy disputes

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.

Related: When marijuana collides with the claims industry

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.

Related: Marijuana growers at risk of being wiped out by California fires

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.

Original article

Hannah Smith (hsmith@alm.com) 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.

Does alarm company’s ‘We are not an insurer’ language overcome negligence claim?

AUG 03, 2017 | BY STEVEN A. MEYEROWITZ, ESQ., DIRECTOR, FC&S LEGAL

This story is reprinted with permission from FC&&S Legal, the industry’s only comprehensive digital resource designed for insurance coverage law professionals. Visit the website to subscribe.

Most businesses and many homeowners have alarm systems that include continuous monitoring. And the customers of the alarm companies rely on the systems to give them warnings of intruders or other problems. But what happens when the alarm system malfunctions, the business owner’s property is stolen, and the insurance doesn’t cover the claim? Can the business owner recover from the alarm company for negligence or does the contract’s limitation of liability language prevail?

A communication ‘error’

Ivan and Krystyna Homola, the owners of EJ Jewelers, Inc., contracted with Protection One Alarm Monitoring Inc., d/b/a Protection 1 Security Solutions, to install a burglar alarm monitoring system and closed circuit television at their store. In May 2014, the Homolas contracted with the company for burglar monitoring services, the terms of which superseded all prior agreements (2014 Agreement).

At approximately 6:00 a.m. on March 20, 2016, the Homolas received a phone call from Protection One informing them that the jewelry store was experiencing a “communication error.” Ms. Homola directed Protection One to call the police.

An hour later, Ms. Homola “called Protection One to follow up and asked if everything was ok and if the store was protected.” Ms. Homola said that she was told that “everything was fine, the police came to the store, and the store was fully secured by the alarm.”

At 1:00 a.m. on March 21, 2016, the Homolas received a second call from Protection One at which time, they were informed “that the store was again experiencing a ‘communication error’ in a few zones” but that there was “no burglary, just a communication problem.”

Later that morning, Ms. Homola again contacted Protection One, and she was told that “everything [was] fine.”

The next day, March 22, 2016, the Homolas went to the store and discovered that it had been burglarized. Apparently, perpetrators had accessed the alarm system’s power supply, which was housed in the basement of a business adjacent to the jewelry store. After disrupting the power, the perpetrators allegedly waited for the “back-up” batteries in the store’s alarm system to dissipate. Like a scene in a movie, the thieves allegedly cut a hole through the roof and descended into the store, stealing more than $500,000 in jewelry.

That same day, the Homolas also learned “that the cameras supplied by Defendant Protection One … had not filmed at all, and the camera’s backup storage provided by Defendant Protection One was completely empty.”

The Homolas filed a claim with their insurance carrier, Jewelers Mutual Insurance Company, which had issued a policy covering losses up to $80,000. However, because the stolen merchandise had been “out of safe or vault while closed to business,” the insurance carrier paid only $5,000 on the claim.

The Homolas then sued Protection One for, among other things, breach of contract and gross negligence. Protection One moved to dismiss.

Protection One’s Limitation of Liability

The 2014 agreement provided:

(A)WE ARE NOT AN INSURER * * * OF YOUR PREMISES OR ITS CONTENTS; (B) IT IS YOUR RESPONSIBILITY TO OBTAIN ADEQUATE INSURANCE COVERING YOU, YOUR PREMISES AND ITS CONTENTS * * *; (D) THE EQUIPMENT AND SERVICES MAY NOT ALWAYS OPERATE AS INTENDED FOR VARIOUS REASONS, INCLUDING OUR NEGLIGENCE OR OTHER FAULT. WE CANNOT PREDICT THE POTENTIAL AMOUNT, EXTENT OR SEVERITY OF ANY DAMAGES * * * THAT MAY BE INCURRED * * * DUE TO THE FAILURE OF THE EQUIPMENT OR SERVICES TO WORK AS INTENDED. AS SUCH: (I) YOU AGREE THAT THE LIMITS ON OUR LIABILITY AND THE WAIVERS AND INDEMNITIES SET FORTH IN THIS AGREEMENT ARE A FAIR ALLOCATION OF RISKS AND LIABILITIES BETWEEN YOU, US AND ANY AFFECTED THIRD PARTIES; (II) YOU WILL LOOK EXCLUSIVELY TO YOUR INSURER FOR FINANCIAL PROTECTION FROM SUCH RISKS AND LIABILITIES, AND (III) * * YOU WAIVE ALL RIGHTS AND REMEDIES AGAINST US, INCLUDING ALL RIGHTS OF SUBROGATION, THAT YOU, ANY INSURER, OR ANY OTHER THIRD PARTY MAY HAVE DUE TO ANY LOSSES YOU OR OTHERS MAY INCUR.

In addition, the 2014 Agreement provided:

Limitation of Liability for Alarm Failure Events. NEITHER WE NOR ANY PERSON OR ENTITY AFFILIATED WITH US SHALL BE LIABLE FOR ANY LOSSES ARISING DIRECTLY OR INDIRECTLY FROM ANY ALARM FAILURE EVENT.

WE ARE NOT LIABLE UNDER ANY CIRCUMSTANCES FOR THE ADEQUACY OF THE EQUIPMENT DESIGN OR DESIGN CRITERIA ESTABLISHED BY YOU, YOUR DESIGN PROFESSIONAL, OR LOCAL CODE REQUIREMENTS, IF, NOTWITHSTANDING THE PROVISIONS OF THIS PARAGRAPH 10(B), WE OR ANY PERSON OR ENTITY AFFILIATED WITH US ARE DETERMINED TO BE RESPONSIBLE FOR ANY LOSSES ARISING FROM ANY ALARM FAILURE EVENT, YOUR CLAIMS AGAINST US AND/OR ANY PERSON OR ENTITY AFFILIATED WITH US SHALL BE LIMITED TO $2,000.00. THIS AMOUNT IS YOUR SOLE AND EXCLUSIVE REMEDY FOR ANY ALARM FAILURE EVENT, EVEN IF CAUSED BY PROTECTION ONE’S NEGLIGENCE OR THAT OF OUR AFFILIATES OR OUR RESPECTIVE EMPLOYEES OR AGENTS, BREACH OF CONTRACT, BREACH OF WARRANTY, STRICT LIABILITY, OR OTHER FAULT.

Further, the 2014 agreement defined alarm failure events as the “condition, nonfunctioning, malfunction, faulty design, faulty installation, or failure in any respect of the equipment or services to operate or perform as intended.”

A complete defense

The trial court granted Protection One’s motion.

In its decision, the trial court explained that the Homolas’ allegations sufficiently alleged conduct on the part of Protection One that, if true, might constitute “gross negligence.” The trial court reasoned that the Homolas alleged that, on two consecutive days, Protection One failed to alert the police and appropriate authorities after having been notified that the alarm system at the jewelry store was experiencing a “communication error”; in response to Ms. Homola’s call to follow up, Protection One responded that the jewelry store was fully alarmed and secured. In a second conversation, Protection One informed Ms. Homola that “there was no burglary, just a communication problem.”

The trial court then ruled that, notwithstanding any alleged gross negligence, the risk allocation/waiver of subrogation provision set forth in the 2014 agreement, which required the Homolas to obtain insurance for all losses occurring at the jewelry store and pursuant to which they waived any remedies against Protection One, functioned “as a complete defense” to the claims asserted by the Homolas against Protection One.

The case is Homola v. Jewelers Mutual Ins. Co.

Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.

Original Article

Recorded Webinars: Laws That Business Owner Should Know

by Carolyn Sennett on June 2, 2016

Employee terminations and payroll record keeping are just two examples of routine business matters that if not handled properly could quickly spiral into a serious problem for business owners.

Employee termination checklist

PrefireChecklist

The law presumes that employees are employed at will. That means an at-will employee may be fired at any time, for any reason (except for a few illegal reasons). But even when termination decisions are made with good cause, there are hundreds of potential grievances that could be filed by former employees. The defensibility of those claims is often dependent on the actions that employers take before the decision to terminate an employee is made or shared.

Watch a 20-minute webinar that guides employers in how to better manage the process before decisions are made so they can take steps now to mitigate those risks.

Overview of federal wage and hour laws

PrefireChecklist

Federal wage and hour claims under the Fair Labor Standards Act (“FLSA”) continue to rise nationwide. Simple errors in payroll or recorded hours worked, while seemingly insignificant on a per employee basis, can lead to significant exposure under the FLSA due to the collective action nature of these litigations.

Watch a 20-minute webinar that guides employers in avoiding common errors and mitigating risks.

The videos were provided under an arrangement with The Hartford Steam Boiler Inspection and Insurance Company. Contact a local Erie Insurance agent to learn more about affordable ways to protect your business.

Marion County fireworks ordinance to take effect

Marion County fireworks ordinance to take effect

Chris Bavender from Indianapolis Metropolitan Police Department · 15 Jun 16

Indianapolis – The Indianapolis Metropolitan Police Department Homeland Security Bureau reminds Marion County residents that the Marion County fireworks ordinance will be in effect starting June 28.

Hours for fireworks use on and around July 4 in Marion County are:

• 5 p.m. until two hours after sunset June 28 through July 3
• 10 a.m. to midnight on July 4
• 5 p.m. until two hours after sunset July 5 through July 9

Under Indiana law, you must be at least 18-years-old to buy fireworks and someone who is 18 or older must be present when fireworks are being set off.

If you are not lighting fireworks on your own property, make sure you have permission from the person who lives there.

Violations of the ordinance are subject to the following fines:

• A $100 fine for the first offense in any 12 month period
• A minimum of $500 for the second offense in any 12 month period
• Up to $2,500 for the third and subsequent offenses in any 12 month period

The complete Indianapolis/Marion County ordinance concerning fireworks is available at http://bit.ly/28FiFEK