A lingering question for the growing cannabis industry has been to what extent insurance could, would or should cover product inventory. Now we have a preliminary answer thanks to a recent decision denying summary judgment to an insurer of a cannabis business in response to bad faith claims brought against it by its insured.
In Green Earth Wellness Center, LLC (Green Earth) v. Atain Specialty Insurance Company (Atain), Civil Action No. 13-cv-03452-MSK-NYW (D. Colorado, February 17, 2016), the United States District Court for Colorado was asked to address multiple issues related to insurance coverage of a commercial cannabis business. Green Earth is a medical marijuana dispensary with an adjacent growing facility. The company secured a commercial property insurance policy through Atain, which by all accounts was well aware of the nature of Green Earth’s business at the time the policy was written. The policy in question provided that Atain would cover Green Earth’s “Business Property,” including its “stock,” which the policy defined as “merchandise held in storage or for sale, raw materials and in-process or finished goods.” This definition of stock mirrors standard language found in many commonly used policy forms.
Green Earth suffered damage to its harvested cannabis inventory as the result of a wildfire. When Atain refused to cover damage to the harvested marijuana product, Green Earth filed suit, alleging breach of contract and bad faith. Atain moved for summary judgment, asking the Court to determine the extent to which an insurance policy must afford coverage for damage to cannabis inventory and whether cannabis is insurable. Atain essentially asked the Court to refuse to enforce the insurance agreement on the grounds that mandating coverage for the inventory would be tantamount to insuring federal criminal activity. Atain did not meaningfully dispute that the harvested cannabis constituted stock, but instead argued that coverage should not be compelled because the stock qualified as “contraband” and was therefore subject to a contraband exclusion.
The Court rejected the arguments by Atain and ordered Green Earth’s breach of contract and bad faith claims to proceed to trial. In denying summary judgment, the Court noted that Atain knew of the nature of Green Earth’s business and that Atain chose to insure Green Earth’s inventory, “without taking any apparent precautions to carefully delineate what types of inventory would and would not be covered.” The Court found that Atain’s illegality argument was “somewhat disingenuous,” and that entertaining the argument would give rise to separate questions of whether the agreement to insure “stock” was nothing more than an illusory promise of insurance operating to unjustly enrich Atain.
One consistent trend in the emerging cannabis regulatory market is that the standard business property insurance policy template does not adequately protect either the insured or the insurer and contains new ambiguities that do not exist when the same policy is applied to traditional commercial enterprises. This decision highlights the importance of insurers understanding the risks of the industry and developing explicit industry-specific language that clearly delineates what is and what is not covered under the policy.