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Clashing Marijuana Laws Create Insurer Anxiety

Insurance Law360
January 22, 2018

By Hernán N. Cipriotti
To read this article in PDF format, please click here.

As the majority of U.S. states move toward various degrees of legalization, marijuana remains illegal at the federal level. This dichotomy challenges courts to evaluate the validity of contracts, including insurance policies, where the subject matter is legal under state law but illegal under federal law. Arizona and Michigan are the latest states to join Hawaii, Colorado and California in demonstrating how courts may deal with this issue in coming years. 

Following our last article concerning (re)insurance issues arising from the burgeoning legalized marijuana industry in the U.S., this article continues to develop these issues and looks at new U.S. case law. While the cultivation and use of marijuana for medical and/or recreational purposes has been legalized in 29 states and Washington, D.C., it remains illegal at the federal level. Many of the insurance issues covered in our last article stem from this dichotomy. This continues to be the main driver of marijuana-related disputes.

U.S. Case Law Developments

Despite the rapid growth of the marijuana industry in the United States, there has not been a correlated growth in the number of marijuana-related disputes reaching the state and federal courts. Most litigated disputes relate to the intersection of legalized marijuana and employment laws, the application of federal laws in states where legalization has taken place (banking regulations, Fair Labor Standards Act and others), and contract claims. Only a handful of cases involving insurance and contractual disputes reached the courts in 2017.

Green Earth Wellness Ctr. LLC v. Atain Specialty Insurance Co.,[1] continues to be the leading case in this area. In Green Earth, the Colorado District Court was presented with a coverage dispute involving an insured medical marijuana business. The insurer had denied a claim arguing that the policy was void ab initio on public policy grounds because there could be no insurable interest in marijuana plants considered illegal under the relevant federal laws. The court refused to declare the policy to be void on public policy grounds, citing a “… continued erosion of any clear and consistent federal public policy in this area …” The court added that an insurer who knowingly issues an insurance policy to a marijuana business is obligated to comply with its terms or pay damages for breaching it.

One of the few opinions to address these issues in 2017 comes from Michigan. Michigan has enacted laws allowing the growth and use of medical marijuana, but has not legalized recreational use. While there had not been any previous decisions decided under Michigan law concerning legal medical marijuana commercial operations and insurance, a recent opinion by the United States District Court for the Eastern District of Michigan provides insight into how courts may deal with the issues presented in Green Earth

In K.V.G. Properties Inc. v. Westfield Insurance Co.,[2] a landlord discovered that some of its tenants had been using the premises to grow marijuana. Upon the eviction of the tenants, the landlord discovered several unauthorized modifications to the premises and extensive damage caused by the indoor growing operation.

The landlord sought coverage from its commercial property insurer for property damage arising out of the modifications and for humidity damage. The claim was denied, and the landlord filed suit for breach of contract and declaratory judgment. The denial of coverage was predicated on three separate exclusions: (1) the illegal/dishonest act exclusion; (2) unauthorized construction or remodeling exclusions; and (3) the repeated moisture or humidity exclusion. The landlord argued that the damage to the properties was caused by vandalism, a covered peril under the policy.

The court agreed with the insurer and found that all three exclusions applied. In concluding that the illegal/dishonest act exclusion applied, the court reasoned:

[p]utting aside whether the … marijuana operations were legal under Michigan law (of which there is no evidence), it is clear that the operations violated federal law … Beyond criminal activity, the exclusion also applies to dishonest conduct … [T]he tenants were supposed to be conducting general office and/or light industrial businesses and [the Insured] did not give the tenants permission to grow marijuana on the property. Moreover, [the Insured] acknowledges that all the alterations to the units to facilitate the marijuana growing operations were done surreptitiously. This suggests that the loss falls under the dishonest/illegal acts exclusion.[3]

The court fell short of pronouncing how coverage would have operated under this particular exclusion, if the growth operation had been legal under Michigan law. However, it appears that the fact that marijuana remains illegal at the federal level was sufficient to support a finding that the illegal acts exclusion applied.

Cases like Green Earth and K.V.G. illustrate the practical impact of the state versus federal issue. If a policy includes and exclusion for illegal acts, does the act have to be illegal under state law, federal law or both? Does this change if the insurer had knowledge of the marijuana-related activities? Under Green Earth, it is unlikely that a Colorado court would hold a policy or contract to be void due to illegality, if the parties entered into the contract willingly. While the court in K.V.G. ultimately did not find coverage, in Arizona, another state where medical marijuana laws have been in effect for years, state courts have found guidance in Green Earth.

In Green Cross Med. Inc. v. Gally,[4] a landlord entered into a lease agreement with Green Cross for a property to allow Green Cross to operate a medical marijuana dispensary. Two weeks after entering into the lease, the landlord revoked the lease arguing that a prior lessee (who also had wanted to operate a dispensary at the property) had a superior interest in the property. Green Cross sued the landlord for breach of contract and sought both a temporary restraining order (“TRO”) and a preliminary injunction. The superior court issued the TRO, and later a preliminary injunction, barring the landlord from revoking the lease. The landlord appealed and the superior court stayed further proceedings pending the appeal. The Arizona Court of Appeals affirmed.

On appeal, the issue presented was whether a contract for the lease of real property to a party applying to operate a medical marijuana dispensary is void for illegality. The landlord argued that he was entitled to judgment as a matter of law because the lease was illegal and therefore unenforceable. The court disagreed and held that the lease entered between the landlord and Green Cross was not void for being contrary to the Controlled Substances Act (CSA), where Arizona had passed the Arizona Medical Marijuana Act (AMMA) allowing for such acts, and the U.S. Department of Justice was prohibited from prosecuting private individuals under the CSA for conduct compliant with state medical marijuana law. Further, the court stated that public policy favored enforcement of the lease that was compliant with state law.

Relying on Green Earth and Mann v. Gullickson,[5] the court provided reasons why the landlord was not entitled to cancel the lease, including the federal government’s lack of interest in prosecuting individuals compliant with state law and public policy favors enforcement of a lease compliant with state law. The court reasoned further that a damage action for wrongful termination of a contract does not violate the CSA because it only supports the enforcement of the contract for an award of damages. Lastly, the court held that “to allow a landlord … to void the lease simply because it might violate the CSA, even though the landlord knew the proposed use of the land when he entered the lease, would undermine the sanctity of contracts and leave a dispensary without a remedy for any monetary losses caused by the breach …”[6]

Green Earth and Green Cross agree that if the state allows the conduct of marijuana-related businesses, federal law may not be used to allege illegality. This is especially true where both parties are aware of the nature of the contract, whether it be an insurance policy or a lease agreement. K.V.G. Properties and Green Cross foreshadow how Arizona and Michigan courts are likely to address the dissonance between state and federal law in the future.

Other U.S. Developments

As with any evolving area of law, insurers and marijuana businesses alike are anxious to see how courts will deal with certain claims that are expected to surface as the popularity of legal marijuana, and litigation surrounding it, increase.

A lot of parallels can be drawn between the alcohol and marijuana industries. A major risk for liability insurers will be cases arising out of dram shop liability, i.e. the imposition of vicarious liability to marijuana businesses for injuries caused by a person to whom marijuana was sold. To date, we have not been able to identify any such cases. The same is true for cases alleging failure-to-warn claims. The diversity of marijuana products on the market is certain to present unique challenges to these claims. Marijuana products vary in potency, delivery method, chemical composition and presence of psychoactive components (e.g. CBD vs. THC concentrates). These claims will present similar issues to the ones discussed in this article.

Will a CGL policy containing an illegal acts exclusion provide cover for a dram shop liability claim arising out of the sale of marijuana? Will courts follow the reasoning behind Green Earth or K.V.G. in deciding these new issues? Brokers and underwriters must be aware of the potential for these types of claims when issuing CGL policies to marijuana-related businesses. The states’ legislatures will also have to consider whether to enact dramshop statutes and standardize warnings. The future of insurance for marijuana-related business will be determined by how courts, the legislatures, and insurance companies react to this new industry. In our next article, we will look at how some of these issues may develop in other non-U.S. jurisdictions where marijuana has been legalized or will be legalized in the near future. Uruguay and Canada have already taken the path to full legalization. Several other jurisdictions are developing industries surrounding marijuana without legalization (see Israel) whereas others are incorporating marijuana into their public health system (see Argentina). As in the U.S., the insurance industry will have to respond to these developments and adapt to local laws. We will explore these topics in our next article.

Hernán N. Cipriotti is an associate with Zelle LLP in London.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 163 F. Supp. 3d 821, 831 (D. Colo. 2016).

[2] No. 16-11561, 2017 WL 5170963 (E.D. Mich. Nov. 8, 2017)(applying Michigan law).

[3] Id. at *3.

[4] 395 P.3d 302 (Ariz. Ct. App. 2017), review denied (Sept. 12, 2017).

[5] For a more detailed discussion of Green Earth and Mann v. Gullickson, please refer to our previous article, Clearing Up the Smoke: Insurance and Marijuana at

[6] Id.

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