Liability insurers of marijuana businesses are probably already aware of Tracy v. USAA Cas. Ins. Co., 2012 U.S. Dist. LEXIS 35913 (D. HI, Mar. 16, 2012). In Tracy, a medical marijuana user made a claim upon her homeowner’s insurance arising from theft of medical marijuana plants. The United States District Court in Hawaii ultimately held that requiring the insurer to pay proceeds for stolen plants was against public policy because marijuana use was illegal under federal law.
A case that insurers may not be familiar with is Green Earth Wellness Center, LLC v. Atain Specialty Ins. Co., 2016 U.S. Dist. LEXIS 19768 (D. Colo., Feb 17, 2016). Green Earth, a recent decision from the United States District Court in Colorado, challenges the Tracy reasoning and provides an opportunity to assess the judiciary’s shifting interpretation of insurance policy terms applied to the loss of marijuana plants and harvested products.
Green Earth was a commercial grower of medical marijuana that grew its plants in pots. When wildfire ash and smoke infiltrated Green Earth’s ventilation system, causing damage to its potted plants and harvested products, Green Earth made a claim with its insurer, Atain. Atain denied the claim and Green Earth filed suit in federal district court. On cross-motions for summary judgment, the Court analyzed two important issues: (1) whether the policy’s “growing crops” exclusion defeated coverage of Green Earth’s potted plants, and (2) whether the “contraband” exclusion and/or public policy defeated coverage of Green Earth’s harvested products.
Green Earth argued that the “growing crops” exclusion did not defeat coverage of its potted plants because the exclusion applied only to plants grown in the earth. The Court rejected this argument, concluding that the term “‘growing crops’ unambiguously encompasses any body of plants tended for their agricultural yield, at least until they are harvested.” In other words, although both potted plants and harvested products could be considered “stock,” a category covered by the policy, because the “growing crops” exclusion eliminated coverage for damage to potted plants, only damage to harvested products could be recovered under the policy. The Court also noted that extrinsic evidence of the parties’ “pre-Policy actions” revealed that the parties had consistently understood that the policy would not cover Green Earth’s potted plants.
Having concluded that the “growing crops” exclusion defeated coverage for Green Earth’s potted plants, the Court then considered Atain’s arguments that the policy’s “contraband” exclusion defeated coverage of Green Earth’s harvested products, and that public policy requires that coverage of Green Earth’s harvested products be denied, even if the insurance policy would otherwise provide it.
The Court rejected both arguments, allowing Green Earth’s breach of contract claim for damage to its harvested products to proceed to trial. The Court found that the “contraband” exclusion was ambiguous due to the federal government’s shifting “de jure” and “de facto” (i.e., on the books and as applied) public policies regarding the application of federal law to state-regulated medical marijuana. The Court characterized the federal government’s enforcement policy as “erratic” and noted the government’s “ambivalence” toward enforcement where possession and distribution “was consistent with well-regulated state law.”[i] For similar reasons, the Court refused to grant Atain’s “indirect invitation” to declare the insurance policy unenforceable as against public policy. In doing so, the Court expressly declined to follow the Tracy decision, “particularly in light of several additional years evidencing a continued erosion of any clear and consistent federal public policy in this area[.]”
While the federal government takes a “wait and see” approach to state experiments in marijuana legalization, insurers can expect more of their insureds to argue that Courts should ignore federal law and precedent when interpreting insurance contracts for medical marijuana-growing businesses.
[i] Additionally, the Court relied on extrinsic evidence showing that Atain entered into the insurance contract with the knowledge that the federal law prohibited Green Earth’s business, and that the parties “shared a mutual intention that the Policy would insure Green Earth’s marijuana inventory and that the ‘Contraband’ exclusion would not apply to it.”