Cannabis Firm Fights Insurer’s Denial of Business Income Loss Claim Following Fire

A Berkshire Hathaway insurer is insisting it does not owe $1.3 million in claimed business income losses to a cannabis growing company after a building fire shuttered one of its “flowering” rooms for 68 days.

National Fire and Marine Insurance Co. and its insured, Theraplant, are at odds over what caused the claimed business income loss and, if there was a revenue loss, whether it had to occur within a certain time period.

National Fire denied the business loss claim stressing that its policy provides coverage for business income loss only if the loss is caused by a suspension of operations. It believes Theraplant’s business income loss was due to damage to marijuana plants, which the policy does not cover, and did not arise from a suspension of business.

Connecticut-based Theraplant contends that its claim is in fact due to a suspension of operations while it was unable to use its fire-damaged flowering room or equipment to develop crops for 68 days because the room was being restored after the fire. Furthermore, the insured argues, this suspension of production was due to the building fire, not due to the uninsured cannabis crops it lost.

Theraplant says the inability to operate the room and produce the product that was growing in the room resulted in lost income of $1,354,593, which was calculated based on the net sales value of production. The policy states that for manufacturing risks, net Income includes the net sales value of production.

National Fire contends that the flowering room’s two-month unavailability had no effect on Theraplant’s production process and that the alleged losses came from its inability to sell products derived from the fire-damaged cannabis crops, property that is not covered by the policy. Theraplant has conceded that all other product was sold in the normal course of business, and all other production areas were still used in the normal course of business, the insurer points out.

Restoration Period

National Fire also argues that a business loss has to occur during “period of restoration,” which begins 72 hours after the loss and ends when the building is repaired. Products derived from the damaged plants would not have been sold for at least four to seven months after the fire, the insurer maintains.

But Theraplant says that the policy does not say the business loss must occur within that restoration period. The policy provides coverage for the actual loss of revenue the insured sustains “due to” the “necessary suspension of operations” during the “period of restoration.”

Whereas the insurer argues that the phrase “due to” imposes a causation requirement, such that the business income loss is caused by the “suspension of operations,” not by some other loss, Theraplant disagrees. It says the term “during the period of restoration” modifies the term “suspension of operations” and it does not modify the term “actual loss of revenue.”

“There is nothing in the coverage agreement that requires the insured to demonstrate an actual loss of revenue during the period or restoration,” Theraplant asserts.

The insurer further argues in the alternative that if there is coverage for business income loss, a policy provision limits any recoverable business income payout per month to $166,666.67, meaning the total loss could only be $333,333.33 for 59 days.

Theraplan says that provision only applies to how much the insurer has to pay out per month and does not affect the $1 million limit on business income losses.

The parties have filed dueling summary judgment motions in federal court in Connecticut.

2020 Fire

It all started on February 8, 2020 when a lamp in a light fixture exploded and caused a fire in the flowering room. The fire damaged walls, equipment, and 998 marijuana plants in the room. All operations in the room needed to be suspended until it was repaired and deep cleaned.

Theraplant’s insurance policy covers building and personal property damage, but does not cover damage to cannabis crops or products.

The parties have no dispute over National Fire’s payments for damage to Theraplant’s building and personal property. National Fire paid $483,233.56 for the damage to Theraplant’s building and it paid $12,482.31 for damage to Theraplant’s business personal property.

The parties’ sole dispute is over Theraplant’s claim for business income loss.

Theraplant was unable to use the damaged flowering room from February 8, 2020 until April 20, 2020. When the fire occurred, all of its six other flowering rooms were fully occupied with cannabis plants that were in the growth stage.

Claims Adjuster

In an initial report, the claims adjuster advised National Fire that he estimated Theraplant’s business income loss from the fire to be $600,000. Later, the adjuster increased the amount to $1,200,000 based on a report from National Fire’s forensic accountant. In June 2020, Theraplant submitted a business Income loss claim for $1,354,593 based on an analysis performed by its forensic loss accountant.

Early on, National Fire acknowledged that Theraplant would likely file a business income loss claim. Between March 2020 and July 2022, National Fire continued to investigate Theraplant’s claim. In October 2020, National Fire issued a second reservation of rights letter informing Theraplant that the policy “may not apply to your claimed damage to your crop” because cannabis or marijuana is not considered “covered property” and that the business income loss claim “must be caused by or result from a covered cause of loss.”

In July 2022, more than two years after the fire, National Fire denied coverage for Theraplant’s business income claim because, according to National Fire, Theraplant did not identify a business income loss during the period of restoration for the damages to its building.

National Fire claims Theraplant is attempting to differentiate between sales income derived from the plants, on the one hand, and direct physical damage to the plants, on the other hand. “Theraplant attempts to circumvent the policy’s exclusion of marijuana crops and derivatives by casting its claim in terms of ‘lost sales value’ to attempt to trigger coverage under the business income provisions. However, this interpretation would render the policy’s crop exclusion and additional property not covered endorsement meaningless,” the insurer’s memorandum states.

Theraplant counters that the policy requires National Fire to pay net income that Theraplant would have earned but for the suspension of operations in the flowering room. “Under an all risk property policy such as the policy in this case, when the efficient cause of loss is a covered risk, coverage is not defeated merely because an excluded risk contributed to the loss or constituted the loss,” the insured concludes.