What happens when marijuana is excluded from coverage?
Damage caused by commercial tenants caught growing marijuana may not be covered by the landlord’s insurance policy.
Even though using or growing marijuana may be legal in a state, an insurer may not be responsible for resulting damages under the insured’s insurance policy.
Recently, the U.S. Court of Appeals for the Sixth Circuit ruled that substantial damage caused by commercial tenants who got caught growing marijuana in their rental units was not covered by the landlord’s insurance policy because of its “dishonest or criminal acts” exclusion.
Related: Legal marijuana: Many insurers just won’t touch it
Using property for a “light” business
K.V.G. Properties, Inc., a commercial landlord, leased several properties to commercial tenants and authorized them to use it for general office or light industrial business. On October 29, 2015, the U.S. Drug Enforcement Agency raided the premises and caught the tenants growing lots of marijuana.
K.V.G. evicted the tenants, but according to the property owner, the damage had already been done. To accommodate their operations, the tenants had removed walls, cut holes in the roof, altered ductwork, and severely damaged the HVAC systems. K.V.G. claimed that the total cost of repair was around $500,000. It filed a claim with its insurer, Westfield Insurance Company.
Westfield denied the claim, and K.V.G. sued the insurer for breach of the insurance agreement. The U.S. District Court for the Eastern District of Michigan found that the loss was excluded by the policy and granted Westfield’s motion for summary judgment. K.V.G. appealed to the Sixth Circuit.
Related: First Cannabis Business Owners Policy approved in California
The Sixth Circuit rules
The Westfield policy’s dishonest or criminal acts exclusion barred coverage for loss or damage caused by or resulting from any:
“[d]ishonest or criminal act by you, any of your partners, members, officers, managers, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose.”
The Sixth Circuit affirmed.
In its decision, the circuit court observed that cultivating marijuana is a crime under federal law, but is protected by Michigan law under certain conditions. The Sixth Circuit found, however, that Westfield had demonstrated that its tenants had engaged in a criminal act by the preponderance of the evidence and that “no reasonable jury” could find that K.V.G.’s tenants had complied with Michigan law.
The Sixth Circuit pointed out that K.V.G. itself had claimed, in eviction pleadings it brought in Michigan court, that each tenant “illegally grew marijuana” in its property and that K.V.G. had stated that the “[i]llegal growing of marijuana” was a “continuing health hazard.” These pleadings were signed by K.V.G.’s lawyer, who sought and obtained immediate possession of the property under Michigan’s summary eviction statute, the circuit court added.
Moreover, the Sixth Circuit added, federal agents had raided the property as part of a criminal investigation. The circuit court reasoned that the raid itself tended to show that the tenants were not “in clear and unambiguous compliance” with Michigan law, especially since at the time of the raid, federal officials were operating under guidance from the deputy attorney general. They stated they should not prioritize “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.” [David W. Ogden, Memorandum for Selected U.S. Attorneys (Oct. 19, 2009)]
According to the circuit court, K.V.G. failed to identify evidence suggesting that its tenants had complied with the MMMA. Instead, the circuit court said, K.V.G. speculated that its tenants could have been complying with Michigan’s marijuana laws. K.V.G. could “not avoid summary judgment by resorting to ‘speculation, conjecture, or fantasy.’”
Finally, the Sixth Circuit rejected K.V.G.’s contention that Westfield could not invoke the dishonest or criminal acts exclusion unless its tenants had been convicted, reasoning that the policy stated “criminal act,” not “crime” or “criminal conviction.” It declined to read a “conviction requirement” into the Westfield insurance contract.
The case is K.V.G. Properties, Inc. v. Westfield Ins. Co., No. 17-2421 (6th Cir. Aug. 21, 2018).
Steven A. Meyerowitz, Esq., (smeyerowitz@meyerowitzcommunications.com) is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. This story is reprinted with permission from FC&S Legal, the industry’s only comprehensive digital resource designed for insurance coverage law professionals.