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According to Business Insider, thirty states currently allow the use of marijuana for medicinal purposes, and nine permit the recreational use of marijuana.[2] Seven years ago, medical marijuana was allowed in seventeen states and the District of Columbia, while the recreational use of marijuana was not permitted anywhere in the United States.[3]  Despite the national trend in statehouses towards the relaxation of restrictions on the use of marijuana, the possession of the drug remains illegal under federal law,[4] and there is no federal exception for medical marijuana.[5]  State law permitting the use of marijuana does not affect the illegality of the possession of marijuana under federal law.[6]

The conflict between federal law and the laws of various states regarding the possession of marijuana can present dilemmas for property insurers.  For example, can an insurer in a state permitting medical marijuana use properly disclaim coverage under a homeowner’s insurance policy on public policy grounds for loss or damage to marijuana plants?  May an insurer of a medical marijuana production facility authorized under state law disclaim coverage for damage to marijuana crops on the basis of a contraband exclusion?  This article will examine two decisions involving questions of coverage for marijuana plants, and discuss their impact on property insurers whose insureds grow marijuana recreationally or commercially.

Tracy v. USAA Casualty Insurance Company

In 2012, the U.S. District Court for the District of Hawaii granted the summary judgment motion of the insurer, USAA Casualty Insurance Company (“USAA”) in an action brought against USAA by its insured, Barbara Tracy, for coverage for stolen marijuana plants.[7]  USAA issued a homeowners insurance policy to Tracy on May 18, 2010, which covered, inter alia, “trees, shrubs and other plants.”[8]  Tracy subsequently filed a claim with USAA seeking coverage for the theft of twelve marijuana plants from her property, that she contended she lawfully possessed in accordance with Hawaii law permitting individuals to possess and grow marijuana for medical purposes.[9]  USAA initially paid Tracy $8,801 for her loss, but refused to pay any more; Tracy alleged that the plants were worth $45,600, and brought suit to recover the difference.[10]

USAA moved for summary judgment on a number of grounds, including that Tracy could not have an insurable interest in property that, like the marijuana plants, was illegal,[11] and also that providing insurance coverage for the stolen marijuana plants would be contrary to federal law and federal public policy.[12]  In addressing USAA’s insurable interest argument, the Court examined Hawaii’s medical marijuana statute, which, as USAA pointed out, merely provided an affirmative defense to marijuana-related state law crimes for the medical use of marijuana:

A qualifying patient or the primary caregiver may assert the medical use of marijuana as an affirmative defense to any prosecution involving marijuana under this [part] or chapter 712; provided that the qualifying patient or primary caregiver strictly complied with the requirements of this part.[13]

The Tracy court observed, however, that the Hawaii Intermediate Court of Appeals had cited another provision of the medical marijuana statute, i.e., section 329-122(a),[14] as creating “an entitlement to the medical use of marijuana[.]”[15]  Moreover, the Tracy court recognized that the legislative purpose of Hawaii’s medical marijuana act was “to ensure that seriously ill people are not penalized by the State for the use of marijuana for strictly medical purposes when the patient’s treating physician provides a professional opinion that the benefits of medical use of marijuana would likely outweigh the health risks for the qualifying patient.”[16]  Although USAA argued that the Hawaii Legislature “expressly disclaimed any requirement that insurers provide coverage for the medical use of marijuana[,]”[17] the Court held that the statute did not “preclude insurers from agreeing to provide coverage for medical marijuana usage.”[18]

In view of the language of Hawaii’s medical marijuana statute, as well as the express legislative intent, the Tracy court predicted that the Hawaii Supreme Court “would hold that a qualifying patient who is in strict compliance with the Hawai’i medical marijuana laws has a lawful interest in her marijuana supply for purposes of [the insurable interest statute].”[19]  The Court therefore concluded that Tracy “had an insurable interest in her marijuana plants which were the subject of her insurance claim.”[20]

Next, the Court examined the decision of the U.S. Supreme Court in Gonzales v. Raich,[21] which determined that the designation of marijuana as contraband for any purpose under the federal Controlled Substances Act[22] prevailed over any state law permitting the medical use of the drug.[23]  It held that Tracy was not entitled to coverage under the USAA policy because her possession and cultivation of the marijuana plants clearly violated federal law and policy:

The Court . . . assumes, for purposes of the instant Motion, that the “Trees, Shrubs and Other Plants” provision of the Policy covered the loss of Plaintiff’s medical marijuana plants. Even in light of that assumption, this Court cannot enforce the provision 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 [federal Controlled Substances Act], Gonzales, and its progeny. The Court therefore CONCLUDES that, as a matter of law, Defendant’s refusal to pay for Plaintiff’s claim for the loss of her medical marijuana plants did not constitute a breach the parties’ insurance contract. The Court GRANTS Defendant’s Motion as to Plaintiff’s breach of contract claim.[24]

Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company

Tracy dealt with a situation in which marijuana plants were not specifically covered under the property insurance policy at issue.  Would there be coverage for marijuana plants under a property insurance policy issued to a commercial medical marijuana grower?  That is the question that was answered in the 2016 decision in Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company.[25]

In that case, Green Earth Wellness Center (“Green Earth”), a retail medical marijuana business, sought coverage under its commercial property insurance policy issued by Atain Specialty Insurance Company (“Atain”) for two separate losses.[26]  The first loss involved alleged damage to Green Earth’s marijuana plants caused when smoke and ash from a June 2012 wildfire overwhelmed Green Earth’s ventilation system, thereby interfering with the growing process.[27]  The second loss occurred a year later, in June 2013, when thieves damaged Green Earth’s roof and ventilation system when they stole some of Green Earth’s marijuana plants.[28]

Green Earth filed suit against Atain after the insurer denied coverage for both claims and, following discovery, the parties moved for summary judgment.[29]  Among the policy provisions relevant to whether the first loss was covered was the definition of the term “stock,” which was included in the coverage grant as “Business Personal Property.”[30]  The policy defined “stock” as “merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.”[31]  The other term relevant to a resolution of whether coverage existed for the wildfire loss was the “growing crops” exclusion, which precluded coverage for “[l]and (including land on which the property is located), water, growing crops, or lawns.”[32]

Although the parties agreed that the harvested flowers and buds that were allegedly damaged by the smoke and ash constituted covered “stock,”[33] Atain contended that coverage for damage to all of Green Earth’s marijuana plants was precluded by the growing crops exclusion.[34]  Green Earth argued that its marijuana plants could not be considered growing crops because crops must grow in outdoor soil, and plants raised indoors in containers, such as its marijuana plants, did not fit that definition.[35]  Moreover, Green Earth argued that the term “growing crops” was ambiguous,[36] and that applying the growing crops exclusion to its marijuana plants would render coverage under the policy illusory.[37]

The Court rejected Green Earth’s arguments, and held that coverage for Green Earth’s marijuana plants (and not the harvested flowers and buds) was precluded by the growing crops exclusion.[38]  In its analysis, the Court concluded that extrinsic evidence,[39] such as the quote and the binder, suggested “that the parties have consistently understood that the ultimate Policy would not cover Green Earth’s marijuana plants, and thus, construing ‘growing crops’ to be ambiguous would inexplicably deviate from the parties’ prior course of dealing.”[40]  With respect to Green Earth’s claim that excluding coverage for growing plants would render the policy illusory, the Court observed that the policy still “insured Green Earth against damage to non-plant business property, such as lighting systems, irrigation systems, ventilation systems, timers, computers and business machines[.]”[41]

The Court then addressed Atain’s argument that coverage for the harvested flowers and buds, which undisputedly qualified as covered “stock,” was precluded by both the contraband exclusion of the policy, barring coverage for “[c]ontraband, or property in the course of illegal transportation or trade,” as well as public policy.[42]

With respect to the contraband exclusion, the Court found that the ordinary meaning of the term “contraband,” which was not defined in the policy, meant “goods or merchandise whose importation, exportation, or possession is forbidden.”[43]  It also recognized, as Atain pointed out, that the possession of marijuana for distribution constitutes a crime under federal law.[44]  Nevertheless, despite the prohibition against marijuana under the Controlled Substances Act, the Court referred in a footnote to numerous Department of Justice memoranda, and observed that as early as 2009, “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.”[45]

Accordingly, the Court held that the contraband exclusion was “rendered ambiguous by the difference between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.”[46]  Additionally, the Court found that the available extrinsic evidence “strongly suggests that the parties mutually intended to include coverage for harvested plants constituting Green Earth’s inventory.”[47]  The Court, therefore, denied Atain’s summary judgment motion on Green Earth’s breach of contract claim arising from Atain’s refusal to pay for the harvested plants damaged by the wildfire.[48]

Finally, the Court rejected Atain’s argument that the insurance policy it issued should be void as against public policy given the inconsistent federal policy with respect to state-regulated medical marijuana:

For the reasons discussed above, and particularly in light of several additional years evidencing a continued erosion of any clear and consistent federal public policy in this area, this Court declines to follow Tracy.  Accordingly, the Court declines Atain’s indirect invitation to declare the Policy void on public policy grounds.  Atain, having entered into the Policy of its own will, knowingly and intelligently, is obligated to comply with its terms or pay damages for having breached it.

Thus, the Court finds that Green Earth’s breach of contract claim with regard to the approximately $40,000 claim made by Green Earth for damage to harvested marijuana buds and flowers damaged in the Waldo Canyon fire must be tried.[49]

The Court denied Atain’s motion for summary judgment with regard to Green Earth’s second loss, for damage to the roof and ventilation system caused by thieves, holding that there was a “triable dispute as to whether the damage caused by this incident is covered by the Policy and whether the amount of that loss exceeds the Policy’s deductible.”[50]

Lessons to be Learned from Tracy and Green Earth

The main point of distinction between Tracy and Green Earth is that in Tracy, the insured sought coverage for the loss of property that was not specifically insured under her homeowner’s insurance policy (although plants were covered, marijuana plants were not), while in Green Earth, “both parties had a mutual intent to treat marijuana products as insurable commodities . . . .”[51]

An insurer faced with a claim similar to the one in Tracy would appear to have a solid basis to disclaim coverage on grounds of federal law and public policy, particularly as federal public policy regarding the use of medical marijuana has shifted in favor of enforcement of the Controlled Substances Act as it is written.  In this regard, by memorandum dated January 4, 2018,[52] Attorney General Jefferson Beauregard Sessions rescinded the previous guidelines that the Green Earth court found reflected an “ambivalence” toward the enforcement of the Controlled Substances Act with respect to marijuana use in a state in which such use is legal.[53]

By contrast, despite the Justice Department’s clarification of its position with respect to the enforcement of marijuana-related crimes in states in which possession of marijuana is legal, a court is less likely to regard favorably a public policy argument to justify a denial of coverage where the insured specifically sought coverage for its medical marijuana growing operations.  The Green Earth court considered the case before it as one in which “both parties had a mutual intent to treat marijuana products as insurable commodities, only to have one party unilaterally seek to abandon that position later.”[54]

As the Green Earth Court observed:

were the Court to be compelled to find that Atain promises were void as against public policy, the Court would be inclined to permit Green Earth to amend its pleadings to replace any claims sounding in breach of contract with a claim that Green Earth’s payment of premiums for an illusory promise of insurance operated to unjustly enrich Atain.  Moreover, given that Green Earth relied upon Atain’s apparent promise of coverage by not seeking out alternative coverage, the Court would be inclined when exercising its equitable powers over such a claim to measure Green Earth’s loss via expectation damages – that is, to award damages to Green Earth that would reflect what Green Earth would have expected to receive had Atain honored the coverage it promised.[55]

To avoid the uncertainty created by the conflict between state laws on marijuana use and federal law and policy, insurers should consider including in policies sold in states that permit marijuana use a clause providing that marijuana plants and growing equipment would be covered consistent with the public policy expressed by the state.  Such a provision would not conflict with federal public policy in the absence of any law prohibiting insurance coverage for such property, and would enhance the salability of the insurance policy.  It would also allow the insurer to deny coverage for the loss of property relating to the recreational use of marijuana in a state in which only medical use is permitted.

[1] Partner at Mound Cotton Wollan & Greengrass LLP.

[2] Melia Robinson, Jeremy Berke and Skye Gould, This map shows every state that has legalized marijuana, BusinessInsider.com, June 28, 2018, available at: http://www.businessinsider.com/legal-marijuana-states-2018-1.

[3] Kastalia Medrano, Puff, Puff, Passed: The Progress Toward Legal Weed in All 50 States, thrillist.com, available at: https://www.thrillist.com/travel/nation/states-that-legalized-weed-marijuana-laws.

[4] United States v. Arizaga, No. 16-CR-89, 2016 WL 7974826, at *2 (S.D.N.Y. Dec. 22, 2016) (citing 21 U.S.C. § 844(a)).

[5] Id.

[6] Id. (citing Gonzales v. Raich, 545 U.S. 1, 27-28 (2005)); Tracy v. USAA Cas. Ins. Co., 2012 WL 928186 at *12 (D. Haw. Mar. 16, 2012) (“Other federal courts have repeatedly recognized that Gonzales establishes that the possession and cultivation of marijuana for medical use is illegal under federal law, even when it is permitted under state law.”) (citing Gonzales, 545 U.S. 1).

[7] Tracy, 2012 WL 928186 at *1.

[8] Id.

[9] Id.

[10] Id. at *1, *4.

[11] Section 431:10E-101 of the Hawaii Revised Statutes defines “insurable interest” as any “lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage.”  Haw. Rev. Stat. § 431:10E-101.

[12] Id. at *2, *11.

[13] Tracy, 2012 WL 928186 at *7 (quoting 2000 Haw. Rev. Stat. § 329-125(a) (emphasis in original)).  The Tracy court sua sponte raised the issue of whether the number of medical marijuana plants that were allegedly stolen exceeded the amount to which Tracy was allowed to possess under the medical marijuana statute and the applicable administrative rule, and concluded that there were “genuine issues of material fact as to whom the marijuana plants stolen from Plaintiff’s residence were legally attributable.  Thus, this Court cannot conclude as a matter of law that Plaintiff’s possession of marijuana plants excluded her from the Hawai’i medical marijuana laws.”  Id. at *8.

[14] Section 329-122(a) provides as follows:

Notwithstanding any law to the contrary, the medical use of marijuana by a qualifying patient shall be permitted only if:

(1) The qualifying patient has been diagnosed by a physician as having a debilitating medical condition;

(2) The qualifying patient’s physician has certified in writing that, in the physician’s professional opinion, the potential benefits of the medical use of marijuana would likely outweigh the health risks for the particular qualifying patient; and

(3) The amount of marijuana does not exceed an adequate supply.

Haw. Rev. Stat. § 329-122(a).

[15] Tracy, 2012 WL 928186 at *9 (quoting State v. Blagus, No. 30016, 2010 WL 3759788 at *2 (Haw. Ct. App. Sept. 29, 2010)).

[16] Tracy, 2012 WL 928186 at *10 (quoting 2000 Haw. Sess. Laws Act 228 § 1, at 595-96).

[17] Id. at *10 (citing Haw. Rev. Stat. § 329-124 (“This part shall not be construed to require insurance coverage for the medical use of marijuana.”)).

[18] Id. (emphasis in original).

[19] Id.

[20] Id. (citation omitted).

[21] 545 U.S. 1 (2005).

[22] 21 U.S.C. § 801, et seq.

[23] Tracy, 2012 WL 928186 at *11.

[24] Id. at *13.  The Court also granted USAA’s motion for summary judgment with respect to Tracy’s bad faith and statutory claims.  Id.

[25] 163 F. Supp. 3d 821 (D. Colo. 2016).

[26] Green Earth,  163 F. Supp. 3d at 823-24.

[27] Id. at 823.

[28] Id. at 824.

[29] Id.

[30] Id. at 827.

[31] Id.

[32] Id. at 828.

[33] Id. at 827.

[34] Id. at 824.

[35] Id. at 829.

[36] Id. at 829-30.

[37] Id. at 831.

[38] Id. at 831-32.

[39] “Colorado law permits the Court to consider extrinsic evidence for the purposes of ascertaining whether an ambiguity exists in the Policy language.”  Id. at 829.

[40] Id.

[41] Id. at 831.

[42] Id. at 832-33.

[43] Id. at 832 (quoting Merriam-Webster Collegiate Dictionary (10th ed.)).

[44] Id. (citing 21 U.S.C. § 841(a)(1), 841(b)(1)(D)).

[45] Id. at 833.

[46] Id.

[47] Id.

[48] Id. at 834.

[49] Id. at 835 (citing Tracy v. USAA Cas. Ins. Co., 2012 WL 928186, at *12 (D. Haw. Mar. 16, 2012)).  Among the issues to be tried was whether the damage to the harvested plants and buds occurred prior to the inception of the policy.  Id. at 832.

[50] Id. at 836.

[51] Id. at 834-35.

[52] January 4, 2018 Memorandum for All United States Attorneys (stating that “[i]n the Controlled Substances Act, Congress has generally prohibited the cultivation, distribution, and possession of marijuana. . . .  These statutes reflect Congress’s determination that marijuana is a dangerous drug and that marijuana activity is a serious crime. . . .  Given the Department’s well-established principles, previous nationwide guidance specific to marijuana enforcement is unnecessary and rescinded, effective immediately.”) (citations omitted, footnote omitted), available at: https://www.justice.gov/opa/press-release/file/1022196/download.

[53] Green Earth, 163 F. Supp. 3d at 832-33.

[54] Id. at 834-35.

[55] Id. at 834, n.8.