How to Handle Insurance Claims Tied to Marijuana

Michael Johnston, the great, great grandson of the founder of one of the first Baptist churches in Texas, grew up being constantly warned about sin, including the evils of television and dancing. Thus it is a bit strange even to him that he has come to be known as the “marijuana guy” among insurance claims professionals.

He thinks his leading qualification for the honor may be that he went to college in the ’70s with roommates who “rolled joints the size of Cuban cigars” and had a dormitory neighbor who cultivated pot plants on the roof.

He actually does have additional real qualifications, too. He graduated law school and is an attorney with Brown Dean Proctor & Howell, a Houston-based corporate and insurance defense firm.

“I did inhale,” he admitted to his audience of claims practitioners at the 2017 Property Loss Research Bureau (PLRB) conference in Boston in March.

“I never thought I would see the day when insurance would combine with marijuana,” he said before sharing his written legal research and insights on the effects of marijuana on property insurance claims and the strategies for handling them.

Insurance Dilemma

Whether a substance is legal is an important consideration under insurance policies, he stressed in describing the current dilemma for the insurance industry.

“We’ve got more than half the states with some form of legalized marijuana,” he said. “They’re all kind of different.”

In fact, 28 states and District of Columbia have legalized medical marijuana in some form and about eight have legalized recreational use to some degree, his research for the PLRB session revealed.

“But marijuana is a defined, controlled substance under federal law,” a Schedule 1 illegal drug under the federal Controlled Substance Act with a “high potential for abuse” considered as bad as heroin.

“So we’ve got federal law telling us it’s illegal to possess, sell or handle it and we’ve got these state laws saying that in some circumstances and under some limitations it’s OK. And even OK to sell. So where does that get us?” he asked.

Although marijuana possession is legal in many states, that is not the final insurance answer.

Insurance coverage is very much an open question for a variety of reasons including that policies typically do not mention or are ambiguous about marijuana, possession is illegal under federal law but the federal government has looked the other way, and the rules and science around marijuana intoxication are unclear.

In the course of his presentation, Johnston asked and answered: is there coverage for marijuana plants stolen from a home, or for harvested products by a grower whose business policy excludes growing crops, or if an insured’s live-in boyfriend burns down a house while toking up, or if an insured driver gets into an accident while using a controlled substance?

Policy Language

Most homeowners policies do not specifically mention marijuana but many do have applicable provisions that may limit an insurer’s liability in marijuana claims, according to Johnston’s research report. In cases where marijuana is being distributed for profit, profit business exclusions or limits on business personal property loss could prevent claims for large quantities.

Also the “trees, shrubs, plants or lawn” provision limits how much can be paid for a plant and it may apply to claims where there is distribution or growing of marijuana plants.

Some states permit caregivers (often not a defined position) to grow a certain number of marijuana plants for their patients. This could be seen as business activity and thus excluded from liability coverage, although the home insurer is often not told about the activity, according to the Texas lawyer.

Unless specifically excluded, a harvested marijuana product may be covered just like alcohol or tobacco, Johnston cautioned.

He said state regulators have generally not gotten involved in marijuana coverage. “The general feeling is that marijuana is legal and that legal amounts should be covered unless a policy specifically excludes it,” he wrote, adding that it remains to be seen if insurers will try to introduce exclusions.

He recommends that insurers clearly express their intent regarding marijuana in all homeowners and dwelling forms.

“It is easy to see that ambiguity in current policy language opens the door for many potential issues,” he stated.

Johnston said insurers should be most concerned about the potential for larger losses like home or building fires related to marijuana use or production.

Court Cases

There are only a handful of court cases thus far to provide guidance on marijuana-related claims. Johnston provided summaries of some key cases.

In a 2013 case (Tracy v. USAA), the claimant in Hawaii wanted USAA Insurance to pay $45,000 for the loss of 12 legal medical marijuana plants stolen from her home. The policyholder cited the “trees, shrubs and other plants” clause. But USAA got the federal district court to agree that the plants are illegal under federal law and thus not covered

In 2013, Nationwide Insurance paid a $160,000 claim by a Michigan homeowner policyholder whose house burned down. Several months later, the insurer sought to recover the money (Nationwide v. Kasey McDermott) it paid after it found out that the fire was caused by her live-in boyfriend who operated a butane “honey oil” lab in the basement to create a concentrated form of marijuana for his patients. The fire was caused when he lit a sample for himself. Nationwide argued several grounds for denying the claim including that the manufacturing facility in the home was illegal, that the insured misrepresented the use of the property, that it fell under the increased hazard and intentional acts exclusions, and that there was no accidental direct physical loss to property. Michigan courts sided with Nationwide because the loss was not the result of an accident and because it was the result of an increased hazard within the insured’s knowledge and control.

A 2016 federal district court ruling out of Colorado (Green Earth Wellness Center v. Atain Specialty Insurance Co.) involved the loss of marijuana plants and harvested products by a marijuana growing business, Green Earth Wellness Center. The policy covered “stock” but had an exclusion for “growing crops.” The policyholder argued that “growing crops” referred only to plants in the earth and it was still covered for most of its potted plants. The court disagreed and said the exclusion covered all the plants.

However, the court did find coverage for the harvested products. It rejected the insurer’s argument that the products fell under the contraband exclusion, finding that the federal government’s “erratic” enforcement of federal laws criminalizing marijuana versus state laws legalizing rendered the term “contraband” ambiguous. For the same reason, it rejected the argument that the policy was unenforceable as against policy.

“While the federal government talks 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,” Johnston warned in his report.

Driving Under Influence

In the area of auto insurance, it is a crime to drive while intoxicated in all states, and there are objective standards for determining intoxication.

But the rules around marijuana intoxication are hazy with uncertainty over what constitutes intoxication and how to reliably test for it. States tend to rely upon the observations of the police, Johnston noted. While some states enforce a zero-tolerance approach, the defense attorney said this approach is “open to both scientific and legal challenges.”

He cited a case involving Arizona’s zero-tolerance law regarding marijuana and driving. Two drivers appealed their driving under the influence (DUI) convictions after they were not allowed to use their medical marijuana cards for their defense. The court ruled the two were not immune to DUI prosecution but given they had legal authorization for medical reasons, they could be exonerated if they could prove that the amount of marijuana in their system was not enough to cause impairment.

He said some states presume that if a driver tests positive for any marijuana at all, the driver is presumed to be under the influence and must prove otherwise.

Making a Federal Case

Even with uncertainty over federal law enforcement, Johnston advises an insurer looking to escape a cooked-up marijuana claim to make a federal case out of it.

Federal law is an insurer’s best hope in such cases due to the U.S. Constitution’s supremacy clause that favors federal over state laws when the two conflict, according to Johnston.

State laws legalizing marijuana obviously conflict with the federal controlled substance act under which marijuana is illegal.

Under President Barack Obama, the U.S. attorney general said as long “as the state regulations are reasonable and the person complies with the state regulation,” the federal government would not prosecute.

However, it is unknown if the Trump Administration and Jeff Sessions, the new attorney general, will follow the Obama approach or begin enforcing the federal law on marijuana. “We don’t know what’s going to happen?” Johnston told the PLRB audience.

What the Trump team does bears watching. “A more hardline approach could see prosecutors going after users, producers and distributors under federal statutes, or filing civil suit to challenge state laws on the basis of preemption,” Johnston wrote in his report. “Should that occur the ramifications for insurers and other industries serving the marijuana industry could be significant.”

He advised insurers on two ways they can get a marijuana-related claim into federal court.

“The insurance company can beat the plaintiff to the courthouse,” he said.

Federal courts have limited jurisdiction, as prescribed by Congress. Among the cases heard by federal courts are those with diversity of citizenship, meaning if the plaintiff and defendant are from different states, and where the amount in controversy is at least $75,000.

Policyholders are required to notify their insurer before filing a suit. Typically a policyholder’s lawyer wants the case heard in state court “so they sue someone in the state” who is the adjuster for the carrier in addition to the carrier, Johnston said. He said an insurer with advanced notice can “beat the policyholder to the courthouse” by seeking a declaratory judgment making itself, not the policyholder, the plaintiff. This way an out-of-state insurer creates diversity with the in-state policyholder and the case can qualify for federal court.

The other way to get to federal court is if there is a federal question at stake in the claim, such as whether state or federal law applies. “This may work even if there is no diversity,” Johnston said.

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