As reported extensively in the media over the past week, the cannabis industry has been hit hard by recent natural disasters. While companies doing business in this industry may face some unique challenges in purchasing insurance, and when attempting to obtain coverage for losses, insurance coverage – contrary to certain media reports – nevertheless may be available to them. As such, cannabis-related companies should not just pass on submitting claims to their insurers when they experience losses. Nor should they reflexively forego obtaining insurance in the first place.
Recent media reports
Both the Northern California wildfires and Hurricane Maria have caused extensive cannabis-related losses:
- On October 13, 2017, The New York Times reported: “Fatal fires that have consumed nearly 200,000 acres in Northern California, devastating the region’s vineyards particularly in Napa and Sonoma Counties, are also taking a toll on a fledgling industry just months before its debut: recreational marijuana. Many of the region’s farms, including those that harvest cannabis, have been scorched, including those in Sonoma County and in Mendocino County, the center of California’s marijuana industry. Mendocino is one of three California counties that comprise [the] Emerald Triangle, where much of the United States’ marijuana is produced.”
- On October 12, 2017, cnn.com reported: “Blazes have destroyed a number of farms in Mendocino County right before legal recreational sales begin in California.”
- Also on October 12, 2017, the USA Today reported that “[m]arijuana farmers and dispensary owners across Northern California are nervously watching as wildfires burn through some of the state’s prime cannabis growing areas and destroy valuable crops ….”
- On October 11, 2017, Marijuana Business Daily reported: “Hurricane Maria devastated Puerto Rico’s medical marijuana industry, setting back its development at least six months – if not much longer – and causing millions of dollars in damage to [medical marijuana] businesses. No outdoor marijuana cultivation facilities survived ….”
Often citing industry insiders, some of these publications have reported that insurance is not available to cover cannabis-related losses. The New York Times, for example, reported that “reliable insurance [is] difficult to acquire.” Other publications went further, stating categorically that no insurance is available to the cannabis industry. CNN reported: “Cannabis cultivators cannot insure their businesses because federal law prohibits marijuana, which means that financial institutions can’t go near it.” Likewise, the USA Today reported that “pot growers can’t get crop insurance like traditional farmers ….”
Do not give up on coverage
However, those blanket statements go too far, and companies in the cannabis industry should not just assume that they cannot obtain any insurance, or that no coverage is available under existing policies for losses they have already experienced.
Today, cannabis-related businesses – especially those in the medical-marijuana industry – can and do obtain various coverages, including, but not limited to, commercial general liability, property, and workers’ compensation insurance. They may also be able to obtain some coverage for damage to their crops from specialized insurers. While the market for all of these coverages may still be limited, there are insurers that will underwrite various types of policies for cannabis-related businesses.
Further, although under federal law, it is still illegal “to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense” marijuana, anyone experiencing a cannabis-related loss should check their various policies and consult with experienced insurance-coverage counsel. There may be coverage.
In The Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company, 163 F. Supp. 3d 821 (D. Colo. 2016), the U.S. District Court for the District of Colorado found that the insurer could not outright refuse coverage under a commercial property and general liability insurance policy for a loss suffered by a medical-marijuana business when certain of its marijuana plants were damaged by smoke and ash from a fire, and others were stolen.
Although, based on a specific exclusion in the policy, that court did conclude that the business did not have coverage for “growing crops,” it still found that certain marijuana plants – those that qualified as “Stock” – were covered. Notably, in reaching this decision, the court rejected the policyholder’s contention that “marijuana plants cannot be considered ‘crops,’ based on various definitions found in federal and state statutes.”
That court also rejected the insurer’s attempt to invoke a policy exclusion for “‘Contraband, or property in the course of illegal transportation or trade,’” and public-policy considerations, to defeat coverage altogether.
After observing that “the nominal federal prohibition against possession of marijuana conceals a far more nuanced (and perhaps even erratic) expression of federal Policy,” it concluded that “the [p]olicy’s ‘Contraband’ exclusion is rendered ambiguous by the difference between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.”
While at least one federal district court has admittedly reached a different outcome, refusing to find coverage for cannabis-related losses, Green Earth Wellness Center offers a better-reasoned approach, and is an important reminder that no business in the cannabis industry should just walk away from potential coverage, especially in light of what appear to be staggering losses as a result of recent wildfires and hurricanes.