Enforceability of Cannabis Coverage Remains Hazy

While the number of states that have legalized marijuana for medical or recreational use continues to grow, the cultivation, sale, distribution and possession of marijuana remains illegal under the federal Controlled Substances Act (CSA). This dichotomy has caused uncertainty concerning the enforceability of the contractual rights of marijuana related businesses (MRBs) and the ancillary industries that serve them, like insurers.

Unfortunately, inconsistent approaches taken by courts in addressing these issues have added fuel to the fire of confusion. A recent decision from the U.S. District Court of Oregon in J. Lilly, LLC v. Clearspan Fabric Structures International, Inc. called into question the enforceability of insurance policies providing first-party coverage to MRBs. In J. Lilly, the court considered whether a business licensed by Oregon to grow marijuana for commercial purposes could seek damages for lost profits under a breach of contract claim.

In that case, J. Lilly claimed it leased a defective commercial greenhouse from Clearspan resulting in a loss of its anticipated marijuana crop. J. Lilly sought to recover the profits it would have realized from the sale of the marijuana had Clearspan’s greenhouse worked properly.

The court dismissed the claim for lost profits, holding that awarding lost profits “would require the Court to compel [Clearspan] to violate the [CSA].” The court relied primarily upon Tracy v. USAA Cas. Ins. Co. (2012), which held that an insurer did not have an obligation to pay for the theft of several marijuana plants under a homeowners’ policy because payment would violate federal law.

The court in J. Lilly distinguished what appeared to be a contradictory 2018 decision from the District Court of Oregon in Tarr v. USF Reddaway, Inc., which held that the plaintiff in a personal injury action could seek lost profit damages derived from a cannabis growing business, on the grounds that Tarr “did not address whether awarding damages to the plaintiff would compel the defendant to violate the CSA.”

The logic and legal framework underpinning the J. Lilly and Tracy decisions could have broad implications for the insurability of first-party risk for MRBs. Taking these holdings to their extreme, any losses arising from damaged marijuana plants or products would be uninsurable, as they are illegal under the CSA. Moreover, any claim for lost profits or business interruption suffered by MRBs would be uninsurable as well. While insurers could arguably agree to cover such losses as a matter of business practice, there would be no mechanism, at least at the federal level, whereby insureds could enforce such coverage obligations.

It is critical to note that such a broad interpretation of J. Lilly would contradict the holdings of other federal courts, which have allowed MRBs to recover for first-party losses of marijuana plants or products.

For example, in Green Earth Wellness Center, LLC v. Atain Specialty Ins. Co. in 2016, the court held that an insured’s recovery under a first-party property policy for damaged marijuana plants and products was not barred by the CSA.

Legislative action at the federal level would help in providing a uniform federal policy regarding the rights and obligations of insureds and insurers operating in states where marijuana has been legalized.