The Green Earth Wellness Center operates a retail medical marijuana business and adjacent growing facility in Colorado Springs, Colorado. In 2012, it purchased commercial insurance from Atain Specialty Insurance Company. Atain issued Green Earth a Commercial Property and General Liability Insurance Policy ( “the Policy”) that became effective June 29, 2012. In The Green Earth Wellness Center, LLC v. Atain Specialty Ins. Co., No. 13-cv-03452-MSK-NYW (D. Colo. Feb. 17, 2016), a Colorado district court addressed novel questions of insurance coverage involving, among other things, damaged and stolen marijuana.

Fire On the Mountain

A few days before the Policy became effective, a wildfire started in Waldo Canyon outside of Colorado Springs. Over the course of several days, the fire advanced towards the city. The fire did not directly affect Green Earth’s business, but smoke and ash from the fire overwhelmed Green Earth’s ventilation system, causing, among other things, damage to Green Earth’s marijuana. Green Earth made a claim for coverage, not only for the damaged ventilation equipment, but also for the damage to the marijuana, including both the potted plants that were still in various stages of active growing, valued at approximately $200,000, as well as dried and harvested product on site and ready for sale, valued at approximately $40,000. Atain denied the claim.

Steal your face right off your head

Toward the end of the same policy period, on June 7, 2013, thieves broke into and entered Green Earth’s growing facility through a roof vent and stole some marijuana plants. While Green Earth did not seek coverage for the stolen plants themselves, it did seek coverage from Atain for damage to the roof and ventilation system, which also resulted in further consequential loss to drywall and interior building contents from water that entered the building through the hole the thieves created in the roof. Atain denied this claim as well, citing among other things its appraiser’s valuation of loss at $2,400, slightly less than the Policy’s $2,500 deductible.

Once in a while you get shown the light

Green Earth commenced a coverage lawsuit in Colorado federal court, asserting breach of contract and bad faith claims against Atain. The parties cross-moved for summary judgment, raising a number of novel of issues for decision.

Atain made several arguments as to why the losses associated with the Waldo Canyon fire were not covered, and the result was ultimately a mixed bag: The Court found triable issues as to whether there was coverage for the already harvested marijuana, but granted summary judgment to Atain for that portion of the loss involving the still-growing plants.

In discussing the differences between the covered and non-covered marijuana, the Court cited Green Earth’s expert’s testimony about the stages of marijuana growing operations:

“[M]other plants” are plants of each individual strain of marijuana that Green Earth offers. Mother plants are not cultivated to produce useable marijuana on their own; rather, they are maintained by the grower solely for the purpose of producing a constant and reliable supply of genetically-identical “clones.” A clone is a portion of the mother plant that is cut off and planted in a growing medium until it produces its own root, becoming a viable marijuana plant in its own right. The clones then grow to maturity. Mature clones are kept by the grower in one of two states: a “vegetative” (or “veg”) state, in which the plant is kept under near constant lighting to prevent it from flowering; and a “flowering” state, in which the plant is subject to intermittent light and darkness in order to induce it to produce flowers and buds. At the appropriate time, the grower harvests the flowering clone, cutting off flowers and buds (and sometimes other portions of the plants), drying that material, and selling it.

Id. at 7.

A Touch of Grey Area

Atain argued that there was no coverage for either category of marijuana, because both categories constitute excluded “contraband” under the Policy’s exclusion for “contraband, or property in the course of illegal transportation or trade.” It cited the fact that possession of marijuana for distribution constitutes a federal crime under 21 U.S.C. §8451(a)(1) and (b)(1)(D). But the Court held that application of this law to Green Earth’s operations was, at best, ambiguous, in light of the federal government’s “erratic” and “conflicting signals” regarding application and enforcement of the law, as set forth in various memoranda from the U.S. Attorney General’s office, Department of Justice and Solicitor General briefs in other federal cases, and the passage of Public Laws 113-235, §538 (2014) and 114-113 §542 (2015) (collectively denying budget funds to the Department of Justice for actions that prevent states from implementing their own laws regulating marijuana. Id. at 18, fn 7. As the Court noted, “[i]n short, the Policy’s ‘Contraband’ exclusion is rendered ambiguous by the difference between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.” Id. at 19.

Acapulco Gold

The Court also addressed Atain’s arguments that it found amount to an “unarticulated” request that the Court declare the Policy unenforceable as a matter of law. Atain relied on a Hawaii case captioned Tracy v. USAA Cas. Ins. Co., 2012 WL 928186 (D. Hi. Mar. 16, 2012), where the court found that, while an insured whose possession of marijuana plants was in conformance with state regulations had an insurable interest in marijuana, the Controlled Substances Act nevertheless prevailed over state law and granted summary judgment in favor of the insurer. The Court in Green Earth, however, declined to follow Tracy for the reasons discussed in its analysis of the contraband exclusion, and “particularly in light of several additional years evidencing a continued erosion of any clear and consistent federal public policy in this area” since the Tracy decision in 2012.

The Court was nevertheless careful to preface this conclusion with the following statement, in light of Atain’s requests for what the Court found amounted to declarations or “assurances” that it would not be ordered to do something illegal:

[T]he Court does not and cannot give “assurances” to a party about the legality of engaging in particular conduct, nor does the Court intend to offer any particular opinion as to “whether . . . it is legal for Atain to pay for damages to marijuana plants and products.” The Court assumes that Atain obtained legal opinions and assurances on these points from its own counsel before ever embarking on the business of insuring medical marijuana operations.

Id. at 21 (emphasis added). In other words, the Court found it a bit late for Atain to argue that providing the coverage it promised when it entered into a contract with Green Earth might be considered aiding and abetting the distribution and sale of a Schedule I controlled substance.

Let it Grow

Atain also argued that the policy’s coverage grant for “stock” did not extend to the live plants that were still growing. The Policy defined “stock” as “merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.” The Court looked to dictionary definitions of the terms and “a cursory internet search” to determine whether a growing plant could be considered “raw material.” It ultimately held that it was not an unreasonable interpretation to conclude that “stock” included the growing plants. Id. at 10.

But, the Court found no ambiguity as to whether the growing plants constituted “growing crops” so as to come squarely within the purview of an exclusion from coverage for “[l]and (including land on which the property is located), water, growing crops, or lawns.” The Court found unreasonable Green Earth’s argument that because the growing plants were potted and indoors, they did not clearly constitute “growing crops” under the cited exclusion, which it argued required some connection to “land.” The Court rejected this interpretation, citing, among other things, a pre-policy quote given by Atain to Green Earth that noted “coverage does not extend to growing or standing plants,” and which Green Earth accepted by entering into a pre policy binder.

Finally, the Court was blunt in its analysis of Atain’s claims that (1) the fire-related losses commenced prior to the policy period, and (2) the theft losses were valued at less than the Policy’s deductible. As to the commencement-of-loss issue, the Court held there were obvious triable disputes of fact as to when the damage or loss actually commenced. As to the valuation of the theft claim, the Court held that while Atain’s appraiser indeed appraised the loss at slightly less than the Policy’s $2,500 deductible, Green Earth had a competing appraisal valuing the loss at approximately $8,000, and this too was an obvious disputed fact that could not be resolved on summary judgment.

It Ain’t No Lie

Finally, the Court evaluated Green Earth’s bad faith claim, arising from the alleged delayed response by Atain in its investigation and ultimate denial of the theft claim. The Court held as a matter of law that it was not unreasonable for Atain to have relied on its appraiser’s valuation in denying the claim, in disagreement with a Colorado state court’s previous opinion that reliance on an expert opinion alone is not a sufficient basis on which to grant an insurer summary judgment on a bad faith claim. It found that decision, captioned Jewkes v. USAA Cas. Ins. Co., D.C. Colo. Case No. 13-cv-01673-RPM (June 26, 2014), “improperly placed the burden on the insurer to demonstrate that its position was reasonable as a matter of law, when the proper allocation of proof requires the insured to demonstrate that the insurer’s position is unreasonable.” Id. at 25.

The Golden Road to Unlimited Coverage?

The Green Earth decision is most remarkable for its conclusion that federal law is ambiguous when it comes to the issue of whether state-sanctioned marijuana operations are “illegal” from an insurability standpoint. But the many corollary issues — e.g., whether potted plants are “growing crops” or whether live marijuana plants constitute “stock” within the meaning of a standard insuring agreement – point out the very difficult tasks insurers face in entering a new, untested, yet lucrative and growing market. To be sure, the ruling was largely favorable to the insurer, as the Court found no coverage for the damaged plants that were still growing, which constituted the bulk of the Waldo Canyon fire claim. Yet, Green Earth is likely grateful for the ruling that the current state of “erratic” federal marijuana policy is ambiguous at best, at least from an insurance coverage standpoint.

As of this writing, four states and the District of Columbia have legalized marijuana for both medical and recreational purposes, and a total of 24 states have legalized it for medicinal purposes. Given that the legalization trend is expected to continue, along with a growing demand for insurance for legal marijuana operations, insurers entering this market must carefully consider and clearly delineate precisely what it is they intend to insure. Insurers that were previously hesitant to enter this market may also take some comfort in the Green Earth ruling, which, although hesitant to make any explicit “declarations” or “assurances” about the legality of insuring marijuana, nevertheless implicitly did so with its core holding.