Ten important steps a cannabusiness should consider when purchasing insurance

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:

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

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.

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

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.







Lloyd’s of London report forecasts multibillion dollar losses due to cloud outages

On Tuesday, January 23, Lloyd’s of London and AIR Worldwide co-published a report regarding the financial fallout that could occur if a cyber incident or shutdown of a cloud computing provider happened in the United States. The report noted that losses could be around $19 billion with only about $3 billion being covered by insurance.[1]  The report also reveals that “[g]iven the state of the cyber insurance industry today, a cyber incident that takes a top three cloud provider offline in the US for 3-6 days would result in ground-up loss central estimates between $6.9 and $14.7 billion and between $1.5 and $2.8 billion in industry insured losses.”[2]  To read more on the insurance perspective of cloud computing, click here: http://bit.ly/2o3rfvx.

  1. lloyds.com
  2. lloyds.com

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

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.”

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

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

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)

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.









In Wake of Disasters, Do Not Just Assume No Coverage Available for Cannabis-Related Losses

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 ….” Continue Reading

“Smoking Gun” Still Not Necessary To Prove Insurer Violated Pennsylvania’s Bad-Faith Statute

In Rancosky v. Washington National Insurance Company, No. 28 WAP 2016, the Pennsylvania Supreme Court confirmed that, to prevail on a claim pursuant to Pennsylvania’s bad-faith statute, a policyholder does not have to prove that an insurance company acted with a “motive of self-interest or ill-will.”  While the Pennsylvania Superior Court had reached the same conclusion more than 20 years ago, the Supreme Court had never addressed the issue until just recently.

Proving that an insurance company acted with a bad motive can be quite challenging. As Reed Smith explained in an amicus brief it filed on behalf of its client in Rancosky, requiring “a policyholder to prove (by clear and convincing evidence, no less) the insurer’s bad motive (i.e., what was in the insurer’s head) … would make it exceedingly difficult to prove statutory bad faith, a task which is sufficiently difficult as is. This is especially true since insurers routinely seek to shield their true motives under the attorney-client privilege or attorney work product doctrine.”

Writing for a unanimous court, Justice Baer agreed, rejecting the insurance industry’s long-running attempt to add just such a requirement to the elements of statutory bad faith in the commonwealth: Requiring “an ill-will level of culpability would limit recovery in any bad faith claim to the most egregious instances only where the plaintiff uncovers some sort of ‘smoking gun’ evidence indicating personal animus towards the insured.”  Justice Baer explained that the court did not believe that Pennsylvania’s legislature “intended to create a standard so stringent that it would be highly unlikely that any plaintiff could prevail thereunder when it created the remedy for bad faith.”

As addressed in more detail in Reed Smith’s recent client alert, “Pennsylvania Supreme Court Agrees That, to Prevail on Claim for Statutory Bad Faith, Policyholder Need Not Prove Insurer Acted with Self-Interest or Ill Will,” the Supreme Court’s decision in Rancosky is a welcome, albeit not unexpected, ruling for policyholders.  It confirms what has been the law of the commonwealth for more than two decades already:  Policyholders are not required to find the “smoking gun” to prevail on a claim for statutory bad faith.