I recently chaired a webinar about marijuana and insurance issues, and I have already been roped into doing another one. I am well aware of how cannabis and insurance are a legally charged combination, and I expect to see an increase of cannabis insurance cases very soon. A federal court in Colorado just came down with an important cannabis insurance ruling in the case of Green Earth Wellness Center, LLC v. Atain Speciality Insurance Company. The case involves a cannabis company that sued its insurance company for failing to pay on claims and for bad faith. It’s important to note that I’m not talking about a cannabis company seeking coverage on a general liability insurance policy for something like a slip-and-fall or for damage to grow lights. To the contrary, this case is a big deal because Colorado Federal District Court Chief Judge Marcia S. Krieger ruled on a summary judgment motion that the actual inventory itself (i.e., the cannabis) is insurable under a general liability insurance policy.
Green Earth, which operates a medical marijuana dispensary as well as a commercial cultivation facility, obtained a general liability insurance policy from Atain in 2012. A few days before securing that policy, “smoke and ash from [a nearby wild fire] overwhelmed [Green Earth’s] ventilation system, eventually intruding into the growing operation and causing damage to Green Earth’s marijuana plants.” Green Earth made a claim under its Atain policy for damage done to its plants. Atain then investigated the claim for several months, and denied the claim in July 2013. Also in July 0f 2013, Green Earth’s grow facility was robbed, and Green Earth filed another claim with Atain for the damage done to its facility by the burglars. Atain again denied the claim, determining that the damage done to the grow facility did not exceed the applicable deductible. On December 20, 2013, Green Earth commenced its lawsuit against Atain, asserting the following three claims:
(i) breach of contract for Atain’s failure to pay the claims Green Earth made under the insurance policy;
(ii) a bad faith breach of insurance contract claim under C.R.S. § 10-3- 1104(h)(VII); and
(iii) a claim for unreasonable delay in payment under C.R.S. § 10-3-1115.
Atain argued that it should be exempt from paying Green Earth’s claims because of a provision in the insurance contract excluding coverage for “[c]ontraband, or property in the course of illegal transportation or trade.” Atain also argued that “public policy requires that coverage be denied, even if the Policy would otherwise provide it.” In turn, Atain asked the Court to resolve two questions:
(i) Whether, in light of [Colorado’s Medical Marijuana Act], federal law, and federal public Policy, it is legal for Atain to pay for damages to marijuana plants and products, and if so, whether the Court can order Atain to pay for these damages; and
(ii) “Whether, in light of [those same authorities], the Policy’s Contraband Exclusion removes Green Earth’s marijuana plants and marijuana material from the Policy’s coverage.”
Atain argued that the answer to its first question is “no” and the answer to its second question is “yes.”
The first important point of the Court’s ruling is what law it applied to the insurance contract. That contract mandates that disputes “will be governed by the law of the state in which the suit is brought.” So, the Court applied state law — as opposed to federal law — which is huge as this meant that the Court did not throw out the policy altogether on the basis of its apparent illegality under federal law.
The Court then held that because the insurance policy failed to define “contraband,” and Atain failed to prove Green Earth violated Colorado’s marijuana laws, and because the federal government has been giving mixed signals about federal marijuana enforcement, the “policy’s “Contraband” exclusion is ambiguous. The Court then looked to the “intention” of the parties regarding coverage for finished inventory and harvested plants and found nothing in the factual record showing that Atain sought to specifically exclude such coverage. In fact, the Court found that Atain knew Green Earth was a cannabis business and yet it issued its insurance policy to Green Earth regardless of federal laws, without making any unequivocal exemption, even under the “Contraband” provision, for finished inventory or harvested plants.
Atain then sought to invoke the federal Controlled Substances Act to argue that its own insurance policy was technically an illegal contract. The Court’s response to Atain’s illegality argument was that “Atain, having entered into the Policy of its own will, knowingly and intelligently, is obligated to comply with its terms or pay damages for having breached it.”
This ruling is a big step forward for the enforceability of marijuana-related contracts and another nail in the coffin for the “illegal cannabis contract” theory. This ruling also highlights the paramount importance of the choice of law, jurisdiction, and venue provisions in a marijuana contract.