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Risk Management

Coverage for marijuana plants is a little hazy

Beware the difference in state and federal law

By Donald S. Malecki, CPCU

Marijuana and insurance! This may appear to be an unusual combination but, believe it or not, they do go hand in hand to some extent. Much, however, depends on how marijuana is used, where and under what circumstances its use is legal, and the extent to which the insured has complied with the provisions of the law in a given state.

Thus far, 19 jurisdictions have legalized the use of marijuana for medicinal purposes. They are Alaska, Arizona, California, Colorado, Connecticut, the District of Columbia, Delaware, Hawaii, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, Oregon, Rhode Island, Vermont, and Washington.

From an insurance standpoint, individuals in these jurisdictions who grow no more than the permitted number of plants for medicinal purposes may have coverage under their homeowners policy if their plants are stolen or are damaged or destroyed by certain perils.

Although the nature and extent of coverage may differ from one policy to another, the 2011 edition of the ISO Homeowners 3—Special Form, HO 00 03, as well as earlier editions, offers a coverage titled Trees, Shrubs and Other Plants.

So long as these kinds of vegetation are on the "residence premises," as defined, and not otherwise excluded, their loss is covered if caused by fire or lightning; explosion; riot or civil commotion; aircraft; vehicles not owned or operated by a resident of the residence premises; vandalism or malicious mischief; or theft.

If the vegetation sustains loss from a covered cause, the insurer is obligated to pay a maximum of 5% of the limit applicable to the dwelling for all trees, shrubs, plants or lawns; but no more than $500 is to be paid for any one tree, shrub or plant.

It is important to keep in mind that coverage for loss to marijuana plants is not absolute. The laws that govern the cultivation and use of medicinal marijuana differ from one jurisdiction to another. Insurance claims handlers can be expected to look carefully at a given state's residency requirements, home cultivation limits, and permitted medical uses, such as cancer, glaucoma, and HIV/AIDS.

A seminal case

The first homeowners insurance case relating to the theft of medical marijuana plants is believed to have been adjudicated in Hawaii in 2012. The case is Barbara Tracy v. USAA Casualty Insurance Company, Civil No. 11-00487 LEK-KSC, U.S. Dist. Ct. Dist. Hawaii, 2012.

Hawaii passed its medical marijuana law in 2000 and permits, for medicinal purposes, the cultivation of no more than seven plants (three mature and four immature). The difference between a mature and an immature plant appears to be open to question. One distinction is that an immature plant, unlike a mature one, has not yet produced flowering.

The plaintiff maintained that her 12 marijuana plants (nine of which were fully matured) were "lawfully possessed, grown, nurtured and cultivated according to state law."

The plaintiff asserted that she was entitled to coverage under her homeowners policy because it included coverage for loss to "trees, shrubs and other plants," under Replacement Cost Coverage—Personal Property HO-728. This wording was the same as that used in the ISO forms.

The insurer agreed to pay the claim and issued payment of $8,801.90 for the loss, but the plaintiff claimed the amount was insufficient. How the insurer calculated that amount is unknown, but based on the coverage provision described above, it would have been $500 per plant for 12 plants or $6,000, subject to the 5% dwelling limit. What the home owner sought, however, was $4,000 for each of the mature plants and $3,200 for each of the immature plants for a total of $45,600.

The insurer responded that it would not make any further payment for the loss because the home owner did not have an insurable interest in the plants, which could not lawfully be replaced. Ordinarily one is considered to have an insurable interest in property if one stands to lose financially if the property is lost or stolen. For purposes of marijuana, however, the Hawaii law defines "insurable interest" as "any lawful and substantial economic interest . . . " Although the plaintiff's economic interest in the plants was not disputed, the legality of the plants was disputed.

The plaintiff maintained that the insurer specifically contemplated coverage and pointed to a part of her policy that excluded coverage for losses involving illegal narcotics, including cocaine, LSD, and marijuana, but expressly stated that the exclusion "does not apply to the legitimate use of prescription drugs by a person following the orders of a licensed physician."

The plaintiff was referring to the exception to the Section II—Liability provision in the ISO form, titled "Controlled Substance." This provision excludes liability for both bodily injury and property damage arising out of the use, sale, manufacture, delivery, transfer or possession of any controlled substance as defined by the Federal Food, Drug and Cosmetic Act.

An exception applies to the exclusion when the insured is legitimately using prescription drugs under the orders of a licensed physician. The insurer argued, however, that the exclusion was inapplicable because it applied only to liability for injury or damage that results from the use of the controlled substance. The exclusion therefore did not apply to property coverage, under which the insured was seeking payment.

One issue raised by the court was whether the plaintiff's 12 plants exceeded what the Hawaii law defined as an "adequate supply" of marijuana and therefore rendered the plaintiff ineligible to lawfully use the marijuana for medical purposes. The plaintiff explained, however, that she resided with her significant other, who was a caretaker for another person, and that all three individuals held the required licenses.

The plaintiff also argued that she was legally authorized to have the 12 plants and that Section I – Property Coverages of her policy, under Coverage C—Personal Property, also covered personal property owned by others while at the named insured's residential premises.

Plaintiff's Achilles heel

Perhaps the plaintiff should have accepted the insurer's offer because the federal district court found in favor of the insurer. The court held that the cultivation of marijuana, even for state-authorized medical use, is still a violation of federal law. This meant that the enforcement of an insurance policy under the circumstances of this case was contrary to public policy. (Note the difference in how the state and federal laws respond to this situation.)

The insurer argued that requiring insurance for marijuana plants was against federal public policy because coverage presupposes that the insured will purchase, sell and/or distribute marijuana plants with insurance proceeds. The insurer emphasized that in Gonzales v. Raich, 545 U.S., 2195 (2005), "while the Supreme Court did not specifically hold that federal prohibitions on marijuana preempted contrary state medical marijuana laws, a growing number of other courts have applied Gonzales and/or the Supremacy Clause, and have so held."

The insurer also argued that Hawaii's medical marijuana laws do not purport to legalize medical use and do not require insurers to provide coverage for medical use. Even if Hawaii law did require such coverage, the insurer added, the coverage would conflict with and therefore be preempted by federal law that prohibits the use of medical marijuana.

The court assumed that, for purposes of this case, the "trees, shrubs and other plants" provision of the plaintiff's homeowners policy covered the loss of her medical marijuana plants. It stated, however, that even in light of this assumption, it could not enforce the provision because the plaintiff's possession and cultivation of marijuana, even for state-authorized medical use, clearly violated federal law.

To require the insurer to pay insurance proceeds for the replacement of medical marijuana plants, the court explained, would be contrary to federal law and public policy, as reflected in Gonzales and later cases. The court concluded that, as a matter of law, the insurer's refusal to pay the plaintiff's claim for loss of her medical marijuana plants did not constitute a breach of the insurance contract. The court also held that the insurer's denial of the claim did not constitute either a violation of applicable state law or bad faith.

In summary

A time may come when the use of marijuana is legal, whether it is used medically or otherwise. According to the Pew Research Center, a majority of Americans favor legalizing the use of marijuana. Support for legalization has increased significantly over recent decades.

The fact that the insurer in the Tracy case was willing to pay what appeared to be a generous amount for marijuana plants under the plaintiff's homeowners policy is an indication that more actions of this nature are likely to be filed.

Insurer claims personnel need to acquaint themselves with the laws of the jurisdictions that have legalized the medical use of marijuana.

Producers should be aware that a homeowners policy may be broad enough to cover the legal use of marijuana on a state level if the insured has satisfied all of the law's requirements, and that taking the dispute to a federal court can be risky for the insured.

The author

Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.

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