How marijuana’s rapid growth is affecting insurance coverage.
One of the more controversial social and political issues affecting the country is the legalization of medical and recreational marijuana. A Gallup Poll released in October 2015 shows 58 percent of American adults think that marijuana should be legal, up from 51 percent a year ago. The U.S. market for legal cannabis grew 74 percent in 2014 to $2.7 billion, up from $1.5 billion in 2013. Public perception of the medicinal and recreational use of the drug has changed over the last decade as 23 states and the District of Columbia have now approved the lawful use of marijuana for certain medical purposes, either by statute or ballot measure.
The use of medical marijuana in each of these states is limited in several ways, including frequency of use and amount of possession. Various state statutes legalizing the use of medical marijuana contain express statements limiting the scope of the statute as it affects third parties, including employers and certain insurance providers. Four states—Colorado, Washington, Alaska, and Oregon—and the District of Columbia have legalized the use of recreational marijuana. At least 10 more states are considering legalizing recreational marijuana in the next two years through ballot measures or state legislatures. If the trend holds true, the potential overall market worth could be close to $11 billion annually by 2019.
Notwithstanding these state laws and the growth of the cannabis industry in general, the possession, use, and distribution of marijuana, for whatever purpose, is illegal under federal law. This dichotomy between federal and state laws has given rise to various legal challenges including, not surprisingly, significant effects on the insurance industry. Activities stemming from the legalization of marijuana, whether medical or recreational, raise a host of coverage questions under traditional employment-related, property, or liability insurance policies that should be considered when evaluating claims arising out of marijuana-related activities.
State Versus Federal
One threshold question relating to insurance coverage for marijuana-related activities is whether an insurance policy can provide coverage for activities that are illegal under federal law. While various states have enacted laws decriminalizing medical and/or recreational use and possession of marijuana or marijuana plants, the U.S. Supreme Court in Gonzales v. Raich established that the possession and cultivation of marijuana for medical use is illegal under federal law, even when it is permitted under state law. In Gonzales, the Supreme Court held that the federal Controlled Substances Act (CSA), which designates marijuana as a Schedule I drug and as contraband “for any purpose,” prevails over state laws with which it conflicts.
In Tracy v. USAA Cas. Ins. Co., for example, the U.S. District Court for Hawaii, following Gonzales, found that the cultivation of marijuana—even for state-authorized medical use—violated federal law and rendered the insurance policy at issue unenforceable. In Tracy, the insured sought to recover for the theft of several marijuana plants under her homeowners’ policy’s “trees, shrubs, and other plants” coverage, which she claimed she lawfully possessed under Hawaii’s medical marijuana law. Although the court found that the insured possessed an economic and lawful “insurable interest” in the plants (a requirement of all insurance policies), it found that the insured’s activities were in violation of federal law and policy. Therefore, the policy could not be enforced.
Notwithstanding the Tracy decision, the U.S. Department of Justice has softened its stance on medical marijuana. In August 2013, Deputy Attorney General James M. Cole issued a memorandum to all U.S. attorneys (referred to as the “Cole Memo”) providing guidance on marijuana enforcement in light of state ballot initiatives legalizing marijuana under state law. Although the Cole Memo affirmed that marijuana remains illegal under the CSA, it identified eight areas of enforcement priority that do not include medical marijuana. Beyond those priorities, the Department of Justice generally will defer to state and local authorities in regulating medical marijuana under state law.
Workers’ Compensation Insurance
Since the legalization of medicinal marijuana, employers and workers’ compensation carriers have struggled with their obligations to reimburse an injured worker’s expenses associated with the purchase of medical marijuana. A workers’ compensation policy typically provides reimbursement to injured workers for “reasonable and necessary” costs of medical care. This threshold requirement often is difficult for carriers to assess given the continued illegality of medical marijuana at the federal level, lack of Federal Drug Administration (FDA) approval, lack of large-scale randomized studies of effectiveness, and inconsistent guidelines for medical marijuana’s use as a treatment for particular conditions. Nevertheless, even if the reasonable and necessary requirement is met, statutes in states—including Michigan, Oregon, and California—contain limitations exempting certain entities or workers’ compensation carriers from mandatory reimbursement of such costs.
Recently, in Lewis v. Am. Gen. Media, the Court of Appeals of the State of New Mexico held that a workers’ compensation insurer was required to reimburse an injured worker for costs of medical marijuana prescribed pursuant to the state’s statute. The court rejected the carrier’s argument that reimbursement was precluded by federal law and public policy. In citing the Cole Memo, the court found that the carrier’s concern that it would violate the law by reimbursing medical marijuana expenses “speculative” in light of the “equivocal” Department of Justice and federal public policy. As such, reimbursement for medical marijuana costs was required. As long as there is a dichotomy between federal and state laws, insurers may face inconsistent rulings as to their coverage obligations.
Employment Practices Liability Insurance
A typical grant of coverage in an employment practices liability policy provides coverage in connection with “wrongful employment practices,” which include the wrongful termination of an employee in violation of law or public policy. Several recent decisions have addressed employment termination based on an employee’s lawful use of marijuana according to state law.
In Coats v. Dish Network, Coats was discharged from his employment after he failed a drug test related to his use of medical marijuana at home during nonworking hours. Coats argued that his discharge violated Colorado’s “lawful activities” statute prohibiting an employer from discharging an employee for “lawful” outside-of-work activities. The Colorado Supreme Court disagreed, reasoning that a lawful activity is that which complies with applicable law, including both state and federal laws. As the use of marijuana remains unlawful under federal law, Coats’ use of medical marijuana was not lawful and the employer’s termination was permissible.
The court in Roe v. TeleTech Customer Care Mgmt. (Colo.) LLC reached a similar decision on different grounds. In Roe, the court found that the Washington statute providing for the lawful use of medical marijuana does not prohibit private employers from maintaining a drug-free workplace and terminating employees who use medical marijuana. Similar decisions have been rendered in California, Michigan, and Montana.
While these cases do not discuss employment practices liability coverage directly, they bear, at least indirectly, on potential exposure for employers and their insurance carriers in states with medical and recreational marijuana statutes. In states such as Colorado and Washington, marijuana-related terminations may be legal, at least for now. It is critical, however, to closely examine a particular state’s medical marijuana statute to determine whether terminating a qualifying medical marijuana patient for a positive drug test is prohibited where that employee was not otherwise impaired on the job. In states where the use of marijuana is legal, a company’s drug policy and how it enforces it takes on increased importance when it comes to underwriting employment practices liability insurance and responding to employee claims of termination or discrimination. Insurers also should carefully consider those employers that choose to accommodate medical marijuana in the workplace given the potential increased exposure for liability to others, workers’ compensation claims, and even potential discrimination claims from employees using nonmedical marijuana.
“First Party” Coverages
Medical and recreational marijuana also may affect traditional first-party policies, such as homeowners’ and commercial property insurance. In Nationwide Mut. Fire Ins. Co. v. McDermott, the 6th Circuit addressed whether an insured was entitled to coverage under her homeowners’ policy when her then-husband (a licensed medical marijuana patient) accidentally started a fire while manufacturing and smoking marijuana in their basement and destroyed their home. The homeowners’ policy provided coverage for “accidental direct physical loss to property,” but excluded losses caused by intentional acts or those caused by “increased hazards” within the control of the insured. Further, the policy required the insured to notify the insurer “as soon as possible of any change that may affect the premium risk” under the policy including, “changes...in the occupancy or use of the residence premises.”
In McDermott, after learning that the husband’s marijuana lab caused the fire, Nationwide challenged its liability through a declaratory action. Nationwide raised numerous grounds for denying coverage, including that the insured failed to report a change in the use of the residence as required by the policy. The 6th Circuit held that Nationwide correctly denied coverage, relying on the fact that the insured failed to notify Nationwide of the change in use of her basement from an area “simply used for storage and [their] washer and dryer to an area where [the husband was] manufacturing and processing marijuana.”
Coverage may, however, exist where the homeowner does not use the home to grow or cultivate marijuana. In Bowers v. Farmers Ins. Exch., the court found that a tenant’s growing operations were covered under a landlord’s protection policy where the tenant’s marijuana growing operations caused damage to the home as a covered act of “vandalism.” These published cases demonstrate that coverage for marijuana-related activities under property policies depends on the facts giving rise to the loss and the nuances of the coverage provided.
Liability policies and certain homeowners’ policies typically provide coverage for bodily injury or property damage to others caused by an “occurrence” or “accident.” Such claims could manifest themselves in an employee’s use of marijuana—legally obtained and consumed—that causes or contributes to an accident at work or, similarly, to liability arising out of the insured’s supplying or distribution of marijuana beyond what is permissible under state law.
Although there is little case law addressing marijuana-related occurrences under liability policies, courts may draw from rulings related to third-party claims involving alcohol and other drug use. Some jurisdictions have held that the voluntary use of an intoxicating substance may affect the insured’s capacity to form intent such that an occurrence may not exist so as to trigger an insurer’s coverage obligations. Marijuana-related claims also may require special attention to certain policy exclusions, such as the “intentional or expected injury” exclusion and the “criminal acts” exclusion. These are just a few of the issues that insurers should be aware of when adjusting marijuana-related liability claims.
Where Do We Go From Here?
Given the rapid expansion of medical and recreational marijuana laws across the nation and lack of clear protection or guidance for such activities under traditional insurance policies, some in the insurance industry have begun to offer products to fill the gap. When providing coverage to those directly involved in the cannabis industry, however, a whole new set of considerations emerges.
In addition to those considerations previously addressed, professional liability insurers and their insureds face dispensary and physician risks implicated with the sale and certification for use of medical marijuana to patients. Insurers and businesses also must be cognizant of premises liability, including security for dispensaries and cultivation centers that still must operate primarily as cash businesses. Similarly, employee theft and fidelity risk are significant concerns given the portability of medical marijuana and robust black market for the drug.
Finally, the use of marijuana and increased consumption of “edibles” raise product liability concerns related to accurate testing and labelling of products. Many of these risks are interrelated, and must be carefully examined before coverage can be provided.
The availability of insurance coverage for those directly involved in the marijuana industry is still developing. Despite marijuana’s illegality under the CSA, recent guidance from the Department of Justice—not to mention specific state enactments anticipating challenges to the marijuana insurance market—should ease some of the anxiety faced by insureds and insurers alike. The McCarran-Ferguson Act of 1945 reserves the regulation of insurance to the states, not the federal government. As the CSA does not specifically relate to the business of insurance, arguably, any state law governing or approving industry-specific insurance policies would escape a blanket cancellation of specific marijuana-related insurance policies where approved and regulated by state law.
Moreover, the decision in Tracy specifically recognized an insured’s “insurable interest” in medical marijuana plants under state law. States also have ostensibly anticipated potential insurable interest or illegality concerns in the insurance context by preemptively stating that contracts related to state-regulated marijuana activities are valid and enforceable. Oregon Measure 91, for example, provides that “[n]o contract shall be unenforceable on the basis that manufacturing, distributing, dispensing, possessing, or using marijuana is prohibited by federal law.” Other states have or are primed to follow suit.
An increasing majority of the population is in support of legalizing medical marijuana at the national level when it is provided but subject to physician oversight. Recent efforts in Congress to defund federal actions aimed at preventing implementation of state medical marijuana laws and to reclassify marijuana under the CSA from a Schedule I to a Schedule II drug also suggest that medical marijuana may soon enjoy wider acceptance and usage. Until then, however, insurers and insureds must continue to evaluate the ever-changing landscape of medical and recreational marijuana as well as the judicial system’s reaction to the increased effect on insurance coverage across the market.