Insureds with Marijuana Operations Must Be Mindful of Illegal Acts Exclusions

Recreational and medical marijuana use laws have been enacted in many states.  Much has been written regarding the conflict between these state statutes, which permit marijuana operations, versus federal law, which considers such operations illegal.  Businesses and other organizations have had to educate themselves on how these marijuana laws affect their employment practices, transportation rules, and safety guidelines.  Not to be overlooked, however, is the impact these laws have on insurance and risk management programs.  To that end, insureds with marijuana operations exposures must be mindful of how their respective policies may respond in the event of a cannabis-related claim.

A recent decision from the United States District Court for the Eastern District of Michigan highlights this concern.  In the case of K.V.G. Properties, Inc. v. Westfield Ins. Co., No. 2:16-cv-11561, a landlord leased several buildings without knowledge of the tenant’s operations.  As later learned, the tenant converted the buildings to a marijuana growing facility and, in so doing, altered the buildings’ structure causing substantial property losses.  The landlord, after regaining possession of the buildings, sought to recover for the losses under its commercial property policy; however, its carrier denied coverage.  A declaratory judgment action ensued where the parties disputed, inter alia, whether the tenant’s (unknown) marijuana operations triggered the policy’s illegal acts exclusion.  The court ultimately found that the exclusion applied.  It held the marijuana operations were and are illegal under federal law, notwithstanding any Michigan state law that would allow recreational or commercial marijuana activities.

The court’s decision is significant for insureds, because it upheld the carrier’s denial of property coverage irrespective of whether the tenants’ marijuana operations could have been legal under state law.

This case serves as a good reminder that insureds’ risk management programs are not immune to the problems related to the discrepancy between federal law and state laws permitting marijuana use and commercial operations.  Indeed, as determined by this one federal court in Michigan, some claims may not be covered.  While the coverage at issue in the Michigan case was specific to property insurance, illegal acts exclusions are common to nearly all policy types.  Therefore, in being mindful of the existence of these exclusions, insureds should work with their respective insurance brokers to secure coverage appropriate for marijuana-related exposures.

Please note that the information contained in this posting is designed to provide authoritative and accurate information, in regard to the subject matter covered. However, it is not provided as legal or tax advice and no representation is made as to the sufficiency for your specific company’s needs. This post should be reviewed by your legal counsel or tax consultant before use.