As the legal markets for marijuana – medicinal and recreational grow – so do the commercial insurance implications. The United States District Court for Colorado just issued an insurance coverage opinion in a case where a marijuana company sued its insurer. Green Earth Wellness Center, LLC v. Atain Speciality Insurance Company, No. 13-CV-03452-MSK, 2016 WL 632357 (D. Colo. Feb. 17, 2016). The case may have national significance going forward because Judge Kruegar, in a 27 page opinion, ruled that the inventory itself, i.e., the marijuana, was insurable under the a "Commercial Property and General Liability Insurance Policy." The ruling contains her opinions on a number of exclusions and whether they apply to commercial marijuana production. 

The Plaintiff-Policyholder, Green Earth, was in the business of commercial marijuana cultivation, which it sold through its own medical marijuana dispensary. According to the opinion, smoke and ash from a nearby forest fire entered the ventilation system of Green Earth, intruding into the growing operation, and causing damage to Green Earth’s plants and inventory. 

Predictably, the Insurer argued that Green Earth was not entitled to coverage because the policy included language that excluded coverage for “contraband” and “property in the course of illegal . . . trade.” More broadly, the Insurer argued that general public policy prevented coverage for marijuana companies. 

The Court characterized Green Earth as having two main types of claims under the policy: a claim for $200,000 for plants currently growing, and a claim for $40,000 of marijuana which was already harvested and being prepared for sale.

Regarding the $200,000 in standing or growing plants, the Insurer argued that the exclusion for “growing crops” applied (and, indeed, the insurance quote provided to Green Earth plainly stated “Coverage does not extend to growing or standing plants.”). This exclusion is straightforward enough and was applied by the Court. “Growing crops” includes “any body of plants tended for their agricultural yield, at least until they are harvested.” Simply put, the policy is not crop insurance, even if your crop is marijuana. 

The claim for $40,000 in inventory was more complex. This case, as much as others, highlights that the law of the forum is incredibly important to insurance coverage disputes. As a threshold matter, the Court applied Colorado state law, and this being a contract, only applied Colorado state law. Then, applying common insurance law maxims, the Court found that the policy failed to define “contraband” and, in light of Green Earth’s legal business in the Colorado medical marijuana trade, that the “contraband” exclusion was ambiguous. The Court went on to state that the “contraband” exclusion is ambiguous in light of the conflict “between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.” Further, in Green Earth’s favor, the Insurer knew about Green Earth’s business in the marijuana industry prior to issuing the policy but never voiced any exception to insuring plants, marijuana-in-process, or the finished inventory. 

The Insurer, in a last-ditch effort, then argued that in light of federal law, its own insurance policy was an illegal contract. The Court ruled that because the Insurer entered into the contract knowing full-well the scope of Green Earth’s business, it was obligated to either (1) comply with the contract or (2) pay damages for having breached it. This argument by the Insurer seems misguided: by intentionally arguing that an Insurer is in the business of marketing and selling insurance contracts that it believes are illegal under federal law, it essentially admits to collecting unearned premium for selling “illusory coverage” or committing other unfair or deceptive trade practices which are often prohibited by state statute and subject to double or treble damages. 

There are other minor issues in the opinion as well. Green Earth, having survived summary judgment, will now have to prove its breach of contract, bad faith, and delayed payment claims at trial. 

This ruling is important for a number of reasons. First, for the Court applied conventional insurance law to marijuana and cannabis growing. Second, it highlights the importance of choice of law, conflicts of law, and venue. In the case of marijuana-related businesses, and in the face of this opinion, the conflicts of law issues can be outcome-dispositive in future insurance coverage disputes. If the Court would have applied another state’s law, the Court may not have found the term contraband ambiguous, and the marijuana grower may have lost. Third, commercial marijuana growers need to investigate obtaining crop insurance if they wish to insure standing and growing plants.