Our client, who is insured under a businessowners form, was in the process of selling an apartment building when an inspection revealed four units had been modified by the tenants in order to cultivate marijuana. They painted over window panes; installed false walls; made openings in the ceiling, floors, walls, and doors to install irrigation and ventilation systems; and removed carpet and installed roofing paper on the floor. The tenants' whereabouts are unknown.

The insured did not authorize the alterations and was not aware they had taken place. The insured submitted a claim for the cost to repair the units.

The carrier stated that the tenants' intentional and purposeful modification was not random or accidental destruction. It also states that the dishonesty exclusion applies because the alterations were the result of illegal and unauthorized activity—the exclusion applies to anyone with an interest in the property or to whom the insured entrusts the property. The insurer stated that “even if the modifications are to be considered damage, any damage caused by faulty design, workmanship, construction, and renovation fall within the Negligent Work exclusion of the policy.”

We would appreciate your comments with regards to this particular claim.

California Subscriber

The exclusions that the carrier lists do not seem to apply to the insured's loss. The dishonesty exclusion states that damage caused by dishonest and criminal acts by the insured or by anyone to whom the property is entrusted is excluded. However, it does not sound like damage from the criminal act of growing marijuana caused the loss. Modifications to the property caused the loss, but were the modifications themselves dishonest or criminal acts? If the growth of marijuana caused mold damage, for example, that would be damage caused by a criminal act. Painting over a window pane is not a dishonest or criminal act.

Likewise, from the insured's standpoint, it does not appear that the negligent work exclusion would apply. The insured did not authorize any work to be done on the property. It could be argued that the alterations were an act of vandalism. The original state of the property has been defaced by the alterations. If the lease allowed for the tenant to make alterations, then that argument cannot be made.