In a recent unanimous decision, the Appellate Division First Department provided clarity on the pleading requirements for policyholders seeking special or consequential damages allowed under the landmark decision of Bi-Economy Market v. Harleysville Insurance Company of New York, 856 N.Y.S.2d 505 (N.Y., Feb. 19, 2008). Under Bi-Economy, policyholders may seek special or consequential damages resulting from an insurance company’s failure to provide coverage if such damages were foreseen or should have been foreseen when the insurance contract was made. Id. at 508. In its prior ruling in Panasia Estates v. Hudson Insurance Company, the First Department noted that the “reference to such damages as ‘special’ in Bi-Economy Mkt. … was not intended to establish a requirement of specificity in pleading.” 889 N.Y.S.2d 452, 453 (N.Y.A.D. 1 Dept., Dec. 15, 2009). The ruling, however, left open the question of what pleading requirements policyholders had to meet in order to state a claim for special damages, a question that it recently answered in D.K. Property v. National Union Fire Insurance Company of Pittsburgh, PA, 2019 WL 237454 (N.Y.A.D. 1 Dept., Jan. 17, 2019).
Every policyholder in every industry should make sure that it in fact has obtained insurance covering the actual, specific risks presented by its line of business.
That point is the critical one driven home by the U.S. District Court for the Central District of California in United Specialty Insurance Company v. E-Cig Vapor Emporium, LLC, No. EDCV 18-0002 JGB (SHKx), 2018 WL 5098859 (C.D. Cal. Oct. 15, 2018). While applicable to any business in any industry, this lesson is particularly valuable to businesses in certain newer industries – such as the vaping, e-cigarette, and cannabis industries – where the market for insurance may be more limited and the coverages offered may be more restrictive.
Federal crop insurance will soon be available for hemp. The federal Agriculture Improvement Act (H.R. 2) (the Act) – which has been approved by both houses of Congress and is now just awaiting the president’s signature – will amend the Federal Crop Insurance Act, 7 U.S.C. §1501, et seq., so that hemp will be a covered “agricultural commodity.”
Federal crop insurance is available only for certain enumerated agricultural commodities, such as wheat, cotton, flax, and corn. Historically, cannabis, marijuana, and/or hemp have not been included among those commodities. That is about to change, at least in part. The Act, known popularly as the 2018 Farm Bill (the Farm Bill), will amend the definition of “agricultural commodity.” Pursuant to Section 11119 of the Farm Bill, the term “hemp” will be added into 7 U.S.C. § 1518 (“‘Agricultural commodity’ defined”), right between “native grass” and “aquacultural species.”
A California Court of Appeal recently held that the alleged loss of use of a premises as a nightclub qualified as “property damage” under a general liability insurance policy. Thee Sombrero, Inc. v. Scottsdale Ins. Co., 2018 WL 5292072 (Cal. Ct. App. Oct. 25, 2018).
Thee Sombrero, Inc. (Sombrero) owned and operated a nightclub in Colton, CA. After a fatal shooting at the club, city officials revoked Sombrero’s use permit and made it so the premises could only be used as a banquet hall. Sombrero sued its private security company, Crime Enforcement Services (CES), claiming that its subpar security caused the shooting and cost Sombrero its ability to run a nightclub on its property.
Sombrero alleged that the property was worth $2,769,231 as a nightclub and only $1,846,153 as a banquet hall. In 2012, Sombrero secured a default judgment against CES for $923,078 – the difference in value between the nightclub and banquet hall.
On Monday, June 4, 2018, the California Supreme Court ruled that an insurance company must provide liability coverage to its corporate insured against claims of negligent hiring, retention, and supervision of its employee, who allegedly sexually assaulted a 13-year-old child. The case is Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co., Inc., Case No. S236765 (June 4, 2018). This decision is “of exceptional importance to injured parties, employers, and insurance companies doing business in California,” wrote the U.S. Court of Appeals for the Ninth Circuit, in an order certifying the issue to the California Supreme Court.
In 2002, Ledesma & Meyer Construction Co. (L&M) entered into a contract with the San Bernadino School District for a construction project at a local middle school. L&M hired Darold Hecht to work on the project. In 2010, a 13-year-old student at the school (Jane Doe), filed suit asserting numerous claims against L&M, alleging that she was sexually abused by Hecht. One of Doe’s claims against L&M alleged negligent hiring, retention, and supervision of Hecht. L&M’s insurer, Liberty Surplus Insurance Corporation, agreed to defend L&M under a reservation of rights.
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.
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.”
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:
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.
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.
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