12 | MARCH 2018 | Claims Magazine | PropertyCasualty360.com
Marijuana is currently legal in varying degrees in 29 states and the District of Columbia, with legalization pending in two additional states. Attempts to legalize marijuana
failed in 2017 in 13 states, as it is still federally illegal as a Schedule 1
A Schedule 1 controlled substance is
illegal to possess or use under federal law.
As it has historically been illegal, growing and selling marijuana operations have
been considered uninsurable due to general policy provisions excluding coverage
for illegal activities, or the public policy
against insuring illegal actions.
According to the McCarran Ferguson
Act, though, regulation of insurance is to
be left to the individual states. Most state
statutes that legalize marijuana expressly
grant an insurable interest in marijuana
up to the legal quantity. Since recreational
use of marijuana is currently legal in eight
states plus Washington, D.C., those state
statutes can legalize insuring marijuana.
The laws are not uniform across the states
where medical or recreational marijuana
is legal, and this becomes a confusing issue for both policyholders and insurers.
Making a case for coverage
This increase in legalization has created a
new realm of coverage issues for insurers
that are willing to insure marijuana risks.
One of those known coverage issues is
that of currency. Since marijuana is still
federally considered a Schedule 1 con-
trolled substance, and banks are federally
insured through the FDIC, banks are re-
quired to function under the current fed-
eral laws. One such law prohibits banks
from accepting money that is suspected
to be associated with the illegal drug mar-
ket. As a result of these laws, it’s estimated
that about 70% of businesses participat-
ing in the flourishing marijuana industry
do not have a bank account.
One example of how the banks not
accepting marijuana money affects the
insurance industry arose in a case a few
years ago. In an attempt to get the bank
to accept the money the insured had collected from his marijuana business, the
insured washed his drug money in his
washing machine, and then transferred
the money to his dryer. During the drying cycle, the dryer exploded. The insured
then filed a claim with his insurance company under his homeowners policy.
A claim like this cannot be denied simply because the insured was in a federally
illegal business. The insured in this case
wasn’t doing anything illegal at the time,
he was just doing something reckless, but
by paying out this claim, an insurer may
be guilty of aiding and abetting in the use
of marijuana, and perhaps conspiring to
violate federal law under the federal Controlled Substances Act. The banking issue
is just one that increases risk for insurers
in the marijuana field.
Two of the largest areas where insureds
expect coverage for marijuana losses, or
due to marijuana activity, are theft and
vandalism. In a case called Bowers v.
Farmers Insurance Exchange, Farmers Ins.
Exc. denied the insured landlord coverage
for mold damage to a rental house. The
damage occurred when the tenants converted the house into a marijuana growing operation. The marijuana cultivation
caused damage to the house, including
mold growth. The landlord filed an action
against Farmers for refusing her claim.
The trial court found in favor of Farmers.
Marijuana and Insurance