Although marijuana remains illegal under federal law, a large number of states over the last twenty years have either legalized or decriminalized marijuana possession and sales, and many others are expected to do so in the coming years. This booming business is generating billions of dollars in sales and millions in tax revenues. With this growth comes the need for insurance, both for property and liability claims.
To date, a very small number of legal decisions have emerged in this area. Not surprisingly, the analysis in these cases has focused on the conflict between federal and state laws regarding the legality of the possession of this property. In a recent decision that should bring clarity to insurers and policyholders in the marijuana industry, the Colorado District Court held that federal public policy did not invalidate a first-party policy issued to a medical-marijuana retail operation. Green Earth Wellness Ctr., LLC v. Atain Specialty Ins. Co., ___ F. Supp. 3d ___, No. 13-CV-03452-MSK-NYW, 2016 WL 632357 (D. Colo. Feb. 17, 2016). The court also found the policy’s contraband exclusion to be ambiguous with respect to marijuana.
The Green Earth Wellness Center operated a retail medical-marijuana business and a growing facility in Colorado Springs. Green Earth applied for commercial property insurance with Atain, completing an application that asked several questions about its marijuana inventory. Atain Specialty issued the policy. Around the same time, smoke and ash from a nearby wildfire overwhelmed Green Earth’s ventilation system, causing damage to its marijuana plants. After Atain denied the claim, Green Earth sued Atain for breach of contract, bad faith, and unreasonable delay in payment. The parties each filed dispositive motions.
Among other things, Atain argued that the loss of harvested bud and flowers came within an exclusion for “[c]ontraband, or property in the course of illegal transportation or trade.” The policy did not define “contraband,” so the court turned to a dictionary definition: “goods or merchandise whose importation, exportation, or possession is forbidden.” Atain argued that the marijuana met this definition because, under the Controlled Substances Act, it is a crime to possess marijuana for distribution. But the court observed that the federal government had publicly pronounced that it would likely decline to enforce the CSA if an entity’s possession and distribution of marijuana was consistent with well-regulated state law such as Colorado’s. This ambivalent approach to enforcement rendered the contraband exclusion ambiguous.
Also supporting the court’s conclusion regarding the ambiguity of the contraband exclusion was Atain’s knowledge that it was insuring Green Earth’s harvested marijuana inventory. Atain’s own application asked Green Earth several questions about that inventory. In the court’s view, neither Atain nor Green Earth intended the contraband exclusion to apply to Green Earth’s harvest.
Using the same reasoning, the court rejected Atain’s suggestion that the insurance contract was void as against public policy. In so doing, the District Court declined to follow the only case on the issue, Tracy v. USAA Cas. Ins. Co., 2012 WL 928186 (D. Haw. Mar. 16, 2012), which held that requiring a first-party insurer to compensate an insured for the loss of marijuana plants would be contrary to federal law and public policy. Enforcing Atain’s and Green Earth’s agreement did not clearly violate public policy, given the federal government’s stated reluctance to crack down on state-authorized marijuana.
In rejecting Atain’s public policy arguments, Green Earth recognizes the reality of the burgeoning marijuana industry and the federal government’s generally hands-off approach to the enforcement of federal anti-marijuana laws in that field. Other courts are also unlikely to be sympathetic to public-policy arguments from an insurer that knowingly sells insurance to a business in the marijuana industry, whether medical or recreational.
