CannaBeware: Make sure insurance actually covers the risks your business faces

It should go without saying that when a business purchases any insurance policy – including, but not limited to, a commercial general liability (CGL) insurance policy – the business expects the policy to provide coverage for its line of business and the specific risks it faces. Cannabis-related businesses are no different. However, they must be especially vigilant to make sure that what an insurance company gives with “one hand” (the coverage grant), it does not take away with the “other” (an exclusion). Remarkably, marijuana-related exclusions may still be found in CGL and other insurance policies marketed and sold to businesses in the cannabis industry.

To better illustrate the concern, consider the following non-cannabis-related scenario: When purchasing insurance, a swimming pool manufacturer would, of course, want to make sure that its CGL policy will provide coverage in the event that a third-party sues the manufacturer for bodily injury allegedly arising out of the use of one of its swimming pools. Conversely, that manufacturer would not want to purchase a CGL policy that excludes coverage for any bodily injury arising out of the use of its swimming pools. While, in that latter situation, the CGL policy may still provide the manufacturer some coverage for certain, limited types of claims, the policy would not provide the manufacturer coverage for the real risks that it faces — that is, those arising out of the use of its swimming pools. Such coverage, therefore, would essentially be illusory coverage. In other words, it would be basically no coverage at all.

Final Mass. “adult-use” marijuana regulations require “Marijuana Establishments” to have liability insurance

By Mike Sampson and Kristy L. Keiser on 16 March 2018 Posted in Commercial General Liability, Insurance Coverage, Insurance General, Insurance News of Note

As part of its “adult-use” marijuana regulations, which are expected to take effect next week, the Commonwealth of Massachusetts will require that “Marijuana Establishments” – which include cultivators, manufacturers, and retailers – procure commercial liability insurance in established amounts. Massachusetts’ new regulations are the most recent reminder that cannabis-related businesses must be aware of state regulations and their insurance requirements.

On March 9, 2018, Massachusetts’ Cannabis Control Commission (the “Commission”) “filed its finalized regulations” intended to govern the Commonwealth’s adult-use marijuana industry with the Commonwealth’s Secretary of State. The “regulations are not yet in effect. … The regulations will become effective when published in the Massachusetts Register.” They “are on track to be published on March 23, 2018.”

Ten important steps a cannabusiness should consider when purchasing insurance

By Mike Sampson on 13 March 2018 Posted in Insurance Coverage, Insurance General

Purchasing insurance for a cannabusiness can feel like a daunting task, but it does not have to be one.

In addition to grappling with many of the same issues and questions that any business confronts when seeking insurance, a cannabusiness encounters certain additional, unique challenges due to the industry in which it operates. That is no reason to panic, however. And, it is certainly no reason to avoid purchasing insurance.

There are a number of steps that a cannabusiness – or, really, any business – can take to maximize the likelihood that the insurance-procurement process will be smooth and successful. In particular, when purchasing insurance, a cannabusiness should consider the following 10 steps:

Should the Cannabis Industry Fear the Sixth Circuit and K.V.G.?

By Mike Sampson on 5 March 2018 Posted in Insurance Coverage, Insurance General, Insurance News of Note, Property Damage & Business Interruption

Although any case has the potential to go sideways, the appeal in K.V.G. Properties, Inc. v. Westfield Insurance Company – which involves a policyholder’s right to insurance coverage for property damaged by a third party’s marijuana growing operation – should not be cause for alarm in the cannabis industry.

As driven home by the opening briefs recently filed by both parties in the U.S. Court of Appeals for the Sixth Circuit, any potential outcome of the appeal (No. 17-2421) is unlikely to negatively affect a legitimate cannabis-related business’ right to insurance.

At issue in K.V.G. is whether a commercial landlord is entitled to coverage from its own insurer for damage done to the landlord’s property by tenants who, unbeknown to the landlord, were using the property to grow marijuana illegally. Below, the federal district court explained that “there is no evidence” that “the tenants’ marijuana operations were legal under” applicable state law.

Recent New York decision offers hope for long-overdue end to Resolute’s free pass

By Mike Sampson, Ann Kramer, Paul Breene and George L. Stewart, II on 13 February 2018 Posted in Commercial General Liability, Insurance Coverage, Insurance General, Insurance News of Note

In a promising development for policyholders, a New York state trial court recently signaled a potential end to the free pass courts often have provided to third-party claims administrators (TPAs), such as Resolute Management, Inc. (Resolute), that has enabled TPAs to act with near impunity when handling or adjusting claims on behalf of their insurer clients.

Previously, courts have demonstrated an unwillingness to hold Resolute and other TPAs responsible for breaches of insurance policies and/or bad faith claims-handling. New York Supreme Court Judge Gerald Lebovits bucked that trend, however, when he refused to dismiss a claim for tortious interference of contract against Resolute in Konstantin v Certain Underwriters at Lloyd’s London, No. 652897/2013 (Jan. 24, 2018).

Resolute – “a wholly owned subsidiary of National Indemnity Company (NICO), which is a wholly owned subsidiary of Berkshire Hathaway, Inc. [(Berkshire)], a conglomerate holding company owned by Warren Buffet” – is a TPA for a number of insurance companies, including certain of those sued in Konstantin. As Judge Lebovits explained in his recent opinion in that case, Resolute performs a number of functions for those insurance companies, including, but not limited to, approving the payment of defense costs and settlements in cases for which those insurers are responsible.

In Konstantin, the plaintiff filed suit when a number of insurers refused to pay a 2012 judgment. Not only did the plaintiff sue those insurers, but the plaintiff also sued Resolute for tortious interference with contract, alleging that the TPA had “directed its insurer clients to refuse paying any amount of the judgment.”

In a victory for not just the plaintiff, but for all policyholders, the court is allowing this claim to proceed. After setting forth and considering the elements of a claim for tortious interference under New York law, the court, in its recent opinion, found that the plaintiff had “sufficiently pleaded that the defendants intentionally procured the breach of … contract.” Therefore, it denied Resolute’s pre-answer motion to dismiss.

In reaching this decision, the court focused on Berkshire and Buffet’s business model – to make money off the “float.” For example, early in its opinion, the court observed that the plaintiff “alleges that [Resolute] has directed its insurer clients to refuse paying any amount of the judgment…, interfering and delaying payment of the claim ‘as part of a business plan designed and intended to maximize the “float” resulting from the delay between the policyholder’s payment of premiums and the date of payment of covered claims.’”

Thereafter, the court also pointed out that “[i]n support of its claims, plaintiff has submitted letters written by Warren Buffet, the chairman of Berkshire Hathaway, Inc., to Berkshire Hathaway shareholders, discussing the company’s growth in ‘float’ – money generated by insurance companies paying the required premiums, and then held or invested by the reinsurer until claims are paid.” The court then relied on those letters when concluding that the plaintiff had sufficiently pleaded a claim for tortious interference with contract.

Notably, the court also rejected the argument that Resolute could avoid liability here because it was an agent of the insurers. In relevant part, the court explained: “That Resolute is an agent of NICO does not, however, make Resolute immune from liability. Plaintiff has sufficiently pleaded in the alternative in the amended complaint that Resolute, even as an agent of NICO, has acted in bad faith and in a predatory manner by withholding funds owed to plaintiff.”

Observing that the evidence Resolute presented did “not refute the plaintiff’s claim that Resolute intentionally procured a breach of contract,” the court added: “Even if Resolute is an agent of the defendant insurers, plaintiff has a facially sufficient pleading not to allow for Resolute’s immunity under a theory of agency.”

Although “all” Judge Lebovits has determined so far is that the plaintiff adequately pleaded a claim against Resolute, his refusal to allow Resolute out of this case at the motion-to-dismiss stage is a welcome development for policyholders.

We will continue to track this case and provide additional updates as it progresses. To make sure that you receive timely updates, please subscribe to this blog by submitting your email address above.

“Myopic” ruling limits policyholders’ ability to recover for common law bad faith in West Virginia

By Mike Sampson and Jorge Rojas on 30 November 2017 Posted in Commercial General Liability, Construction Coverage, Insurance Coverage, Insurance General, Insurance News of Note

The Supreme Court of Appeals of West Virginia has made it harder for policyholders to prevail on claims of common law bad faith against insurers in that state. In State of West Virginia ex rel. State Auto Property Insurance Companies v. Stucky, No. 17-0257, 2017 WL 4582607 (W. Va. Oct. 10, 2017), West Virginia’s highest court held that an insurance company cannot be held liable for bad faith regardless of its dilatory conduct, so long as it ultimately defends and indemnifies its policyholder. As the dissent in Stucky observed, however, “[t]his over-simplified approach is myopic.”

In Stucky, the policyholder was a construction company that allegedly damaged a couple’s home. The construction company, though, believed it “was insured for the damage to the … property under a commercial general liability policy ….”

Although the company’s insurer initially agreed “that it would handle the claim,” the insurer nevertheless allegedly “conducted a series of inspections and investigations, thereby delaying a potential settlement of the plaintiffs’ lawsuit, increasing the amount of the plaintiffs’ property damage, and resulting in the lawsuit filed against [the construction company] by the plaintiffs.”

Marijuana and the “Illegal/Dishonest Acts Exclusion”: Making Sense of K.V.G. Properties, Inc. v. Westfield Insurance Company

By Mike Sampson on 13 November 2017 Posted in Insurance Coverage, Insurance General, Insurance News of Note, Property Damage & Business Interruption

A recent federal court decision in “a property loss insurance case” involving the unauthorized growing of marijuana could have a negative impact on the enforceability of insurance policies sold to legitimate marijuana-related businesses. How much of an effect remains to be seen, but there is reason to think it should be minimal.

At issue in K.V.G. Properties, Inc. v. Westfield Insurance Company, No. 16-11561 (E.D. Mich. Nov. 8, 2017), was an insurer’s denial of a commercial property owner’s claim for coverage under a “commercial insurance policy.” Certain of the property owned by the policyholder, which was intended to be “used for general office or light industrial business,” was damaged when the tenants to whom the property was rented used the property to grow marijuana. As the court explained, growing marijuana was “an activity not authorized” by the policyholder. In fact, the property owner was unaware that its tenants were using its property for that purpose until learning that “DEA agents executed a search warrant on the” property.

Nonetheless, the insurance company denied the property owner coverage for the damage to the property caused by that unauthorized activity.

In relevant part, the insurer relied on the “illegal/dishonest acts” exclusion in its policy, which precludes coverage for damage caused by a “[d]ishonest or criminal act by … anyone to whom you entrust the property for any purpose.” Continue Reading

Beware the Fine (Thumb) Print: Insurance Coverage for Class Actions Under the Illinois Biometric Information Privacy Act, and Similar Biometric Privacy Statutes

By Andy Moss, David Cummings, Robert Deegan and Michael Galibois on 31 October 2017 Posted in Cyberliability, D&O, E&O, Professional Liability, Employment Practices Liability, Insurance Coverage, Insurance News of Note

Since July 2017, national, regional and local businesses operating in Illinois have been hit with a virtual storm of class actions under the Illinois Biometrics Privacy Act (“BIPA”), 740 ILCS 14 et seq. BIPA regulates how businesses may record and store biometric data from customers or employees, and these actions create the potential for significant losses, including the costs of defending class action litigation and potential awards of statutory damages. Defending, settling and paying judgments in claims under BIPA may be covered in whole or in part under cyberliability, media liability, and/or employment practices liability insurance. Businesses operating in Illinois and states with similar laws (such as Texas and Washington) should carefully review their liability insurance programs to determine whether they may respond to a claim under BIPA or a similar statute, and should provide prompt notice of claim in the event of a suit.

The Illinois BIPA requires written consent before any biometric data can be collected and stored; requires companies to develop a publicly available written policy disclosing its schedule and guidelines for its retention of, and eventual permanent destruction of, employees’ biometrics; and mandates how companies must handle biometric data once in possession. If a company fails to abide by the consent, disclosure, or handling requirements, an employee may recover the greater of either (i) actual damages, (ii) $1,000 for a negligent violation, or (iii) $5,000 for an intentional or reckless violation. Awards of plaintiffs’ attorneys’ fees and injunctive relief are also available. Continue Reading

Insurance Recovery Tips for Companies Suffering Damage after Recent Disasters: 2017 Hurricanes (Harvey, Irma, Maria, Nate), Earthquake (Mexico City), and Wine Country Wildfires (California)

By John Shugrue, James M. Davis and Kevin Dreher on 26 October 2017 Posted in Insurance Coverage, Property Damage & Business Interruption

Companies are facing operational and logistical challenges in recovering from the widespread destruction caused by these natural disasters. They will be looking to property damage and business interruption insurance to get them back on track. The time and cost to return to normal operations could be unusually long given the widespread destruction and the lack of labor and resources. Multiple causes of loss impacted many properties, while others endured more than one disaster event. Service interruptions may last well beyond the norm in some areas. All of these severe circumstances could lead to disputes with insurers over maximum coverage for losses if the claim is not carefully handled.

To assist with this insurance recovery process, Reed Smith teamed up with Brad Murlick and Drew Olson from BDO USA to provide an informative free webinar on: “Insurance Recovery for Natural Disasters: Hurricanes, Fires and Earthquakes.” The audio from this webinar can be heard here, and the slides are available here. The webinar contains a wealth of helpful knowledge in handling these claims, such as: the importance of specific policy language, the types of coverage typically available, tips on preparation of your claim, expected areas of dispute with insurers, and thoughts on assembling a team of experts to assist with the claim.