The insurer filed a motion for summary judgment after the insured made a claim under her homeowners policy for payment due to the theft her marijuana plants. This case is Tracy v. USAA Casualty Insurance Company, 2012 WL 928186 (USDC, D. Hawaii).

Tracy 's marijuana plants were stolen and she asserted a claim under her homeowners policy because the policy includes coverage for loss to trees, shrubs, and other plants. Furthermore, she contended that the exclusion in the policy referring to illegal narcotics expressly does not apply to “the legitimate use of prescription drugs by a person following the orders of a licensed physician. Tracy did have medical licenses to grow marijuana plants as per Hawaii law. The insurer denied coverage, claiming that the insured did not have an insurable interest in the plants, which could not be lawfully replaced. Moreover, the insurer said that requiring insurance coverage for marijuana plants would be against federal public policy.

The court noted that the insurer did not dispute that Tracy had a substantial economic interest in the plants, but questioned whether the interest was lawful. After reviewing the state law, the district court found that the law does not require insurers to provide coverage for medical marijuana usage; it also does not preclude insurers from agreeing to provide coverage for such usage. Therefore, the court held that a qualifying patient who is in strict compliance with the Hawaii medical marijuana laws has a lawful interest in her supply for purpose of the state statute. So, Tracy did have an insurable interest in her marijuana plants that were the subject of her insurance claim.

As for the insurer's assertion that providing coverage for the plants would be contrary to federal law, the court noted that a court may refuse to enforce a contract that is illegal or in violation of public policy. In this instance, the court said that Congress expressly made marijuana a controlled substance and its use illegal. Moreover, state medical marijuana laws do not supercede federal laws that criminalize the possession of marijuana. So, the court would not enforce the provision in the homeowners policy covering trees, shrubs, and other plants as it relates to marijuana since that clearly violates federal law. To require the insurer to pay insurance proceeds for the replacement of medical marijuana plants would be contrary to federal law and public policy. The insurer's motion for summary judgment was granted.

Editor's Note: This case is discussed for the court's opinion on insurable interest. The U.S. District Court ruled that insurable interest need not be a free and unencumbered interest. So, even though marijuana possession in itself is illegal under the law, the fact that Hawaii allowed the insured to grow marijuana for medical purposes established an insurable interest in the marijuana plants for her.

The case is also discussed for the court's opinion that an insured cannot be compensated for the loss of marijuana plants since such plants are contraband under federal law, and any insurance payment for the loss would be contrary to federal law. The court would not enforce a contract that violated the law.

Rental Car Company Versus Car Renter's Insurer

The car renter's auto insurer sought a declaration that a self-insurer rental car company had no right to recover from the insurer or the renter for damages the company paid to a third party due to the renter's negligence in an auto accident. The rental car company sought a declaration that the renter had to indemnify the company pursuant to the indemnification provision of the lease agreement. This case is Farmers Insurance Exchange v. Enterprise Leasing Company, 708 S.E.2d 852 (2011).

The insured rented an auto from Enterprise Leasing Company, a self-insured rental car company. The lease agreement provided the insured the option of purchasing supplemental liability protection (SLP) for an additional cost; the insured declined. The lease also contained the following indemnification provision: renter shall defend, indemnify, and hold owner harmless from all losses, liabilities, damages, injuries, claims, demands, costs, attorney fees, and other expenses incurred by the owner in any manner from this rental transaction.

The insured also had an auto insurance policy with Farmers that provided coverage for cars that the insured rented as a temporary substitute while the owned vehicle was being repaired; in this instance, the rental car fit this description. The policy also contained an other insurance clause that stated the insurance provided with respect to a temporary substitute auto shall be excess insurance over any other collectible insurance. While driving the rental car, the insured was involved in an accident for which the insured was negligent. The involved parties agreed that the insured was liable for the damages to the other driver's car that totaled $5,000. Enterprise paid this sum and then sent a letter to the insured notifying him that it claimed a right of reimbursement from him for the payment. The insured refused to indemnify Enterprise .

Farmers filed a complaint for declaratory relief asking the court to determine whether Enterprise had a right to recover from Farmers or the insured under the terms of the insurance policy and the lease agreement. Enterprise filed an answer and a counter claim. The court ruled in favor of Enterprise and the case was appealed to the Supreme Court of Virginia.

The insurer argued that a self-insured rental car company must provide primary bodily injury and property damage liability insurance coverage to its renters. Enterprise argued that it did provide primary coverage by promptly paying the third party's damages for which the insured was liable, and the lease agreement allowed the claim for reimbursement for that payment. The Supreme Court said that this case presents the following issue: whether a self-insured rental car company may seek indemnification from its renters for damages caused by the renter's negligence once the rental car company has satisfied its obligation to afford primary coverage as required by previous state case law.

The court noted that the insured made a choice when he rented the car concerning his responsibility to Enterprise for damages to third parties. He could have purchased the SLP, which would have afforded him independent insurance against his obligations to indemnify Enterprise for the damages to the third party. By declining to purchase the SLP, the insured subjected himself to the terms of the indemnification provision which required him to indemnify Enterprise for damages paid to the third party.

Moreover, in an answer to the insurer's assertion that making the insured repay Enterprise violates the anti-subrogation rule which prevents an insurer from seeking indemnity from its insured, the court said that the anti-subrogation rule applies to insurers. Enterprise is a self-insurer, not an insurer, and there is a distinction between insurance companies and self-insurers. Self-insurance does not involve the transfer of risk of loss, but rather a retention of that risk, making it the antithesis of insurance. Therefore, Enterprise is not an insurance company and the anti-subrogation rule does not prohibit Enterprise from seeking indemnification from the insured pursuant to the indemnification provision of the lease agreement.

Farmers also contended that self-insurance qualifies as collectible insurance, and this means that its coverage is excess pursuant to the other insurance clause in the auto policy. The court did not agree. The court stated that self-insurance is not insurance as that term is used in an other insurance clause.

The judgment of the lower court was affirmed in favor of Enterprise .

Editor's Note: A key point in this decision by the Supreme Court of Virginia turns on the issue of whether self-insurance is insurance as that term is recognized. The auto policy did state that coverage for vehicles not owned by the named insured was excess over any other collectible insurance. However, the court held that under Virginia law, self-insurance is not the equivalent of insurance, and it noted that this position is shared by a number of jurisdictions (the court cited cases from the Eighth Circuit, the District Court from the Eastern District of North Carolina, Alabama, Idaho, and Florida ).

Indiana Supreme Court Reiterates Pollution Exclusion Opinions

The commercial liability and umbrella insurer brought an action for declaratory judgment that it had no duty to defend the insured for the costs of cleanup of trichloroethylene (TCE) that was found in groundwater both on and off the insured's site. This case is State Automobile Mutual Insurance Company v. Flexdar, 2012 WL 966052 ( Ind. ).

Flexdar manufactured rubber stamps and printing plates at its Indianapolis facility from 1994 through 2003. Flexdar's manufacturing process used a chemical solvent called trichloroethylene. In 2004, Flexdar discovered that TCE was present in the soil and groundwater both on and off the site. The state environmental department informed Flexdar that it would be liable for the costs of the cleanup. Flexdar filed a claim with its insurer, State Auto. The insurer filed a declaratory judgment action contending that the pollution exclusion in the liability policy prevented coverage. The trial court ruled in favor of the insured and the appeals court agreed. The case was then appealed to the Indiana Supreme Court.

The court noted that the language of the pollution exclusion at issue in this case was no stranger to the court. The court then reviewed its previous decisions concerning the pollution exclusion and stated that, in keeping with these decisions, the ruling here is that the pollution exclusion is ambiguous. The main point from the court was that the definition of pollutants in the exclusion is ambiguous and so, the rulings are against the insurance company position.

The definition of pollutant in the policy was this: any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. The court found this definition cannot be read literally as it would negate virtually all coverage. In other words, practically every substance would qualify as a pollutant under this definition, rendering the exclusion meaningless. The court then went on to describe its overall view of the pollution exclusion.

According to the Indiana Supreme Court, there are two main views when it comes to interpreting the pollution exclusion: a literal approach and a situational approach. The literal view of the pollution exclusion generally holds the exclusion to be unambiguous in all circumstances. Where a substance is acting in any manner as an irritant or contaminant, damage caused thereby is excluded from coverage. The situation approach looks at factual context and typically upholds the exclusion only in cases of traditional environmental contamination. The court then stated that Indiana has gone in a different direction.

Applying basic contract principles, the decisions of the Indiana Supreme Court have consistently held that the insurer can, and should, specify what falls within its pollution exclusion. In other words, insurers have to be specific in identifying something as a pollutant. In this case, the court held that State Auto should have stated in its insurance policy specific examples identified as pollutants and since it did not, an ambiguity exists and this means the policy language has to be interpreted in favor of the insured. The opinions of the lower courts were affirmed.

Editor's Note: This case is presented to showcase Indiana 's interpretation of the pollution exclusion. The court noted the different judicial views of the meaning of pollutant and then states that Indiana goes its own way. Indiana wants insurers to list substances that that insurer considers to be a pollutant so that the pollution exclusion can then specifically identify to what it applies. This might seem to result in a policy that contains far too many pages to be a practical form, but the court notes that there can be an endorsement that is more explicit and that could then be upheld.

Indiana Changes—Pollution Exclusion, an endorsement issued by State Auto in 2005, did more specifically define the term “pollutant”. This endorsement listed substances like TCE, perchloroethylene PERC), tetrachloroethylene, methylene chloroform, and (in a general, catch-all category) all substances specifically listed, identified, or described by one or more of the following references: Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) Priority List Hazardous Substances, Agency for Toxic Substances and Disease Registry ToxFAQs, and/or U.S. Environmental Protection Agency EMCI Chemical References Complete Index. The Indiana Supreme Court said that this pollution exclusion would not be considered ambiguous.

Perhaps other insurers should consider the Indiana approach and try to remove the continuing disputes over the scope of the pollution exclusion.