The 7 Worst Exclusions on Cannabis General Liability Insurance Policies

The 7 Worst Exclusions on Cannabis General Liability Insurance Policies

Look Inside your Cannabis Insurance Policy to Avoid Surprises

The following is a list of exclusions we’ve found on a variety of cannabis commercial general liability policies over the years, we had to publish because they can lead to harsh consequences or surprises for business owners. 

Typically, exclusions can be embeddedare separated from the main body of the commercial liability and meant to notify the policy holder of circumstances when coverage may not be offered.

Cannabis Insurance 7 Costly Exclusions

Cannabis business owners should look for these exclusions

  1. The Washington Changes to Defense Cost Exclusion: Perhaps the worst and most despicable exclusion we’ve seen on a cannabis general liability policy because it gives the right to the insurance carrier to seek reimbursement for claims that are not covered. The exclusion is in direct conflict with another policy condition that requires insured’s to notify their carrier of potential claims.  This exclusion will leave many cannabis companies with either a big dilemma or a bill they weren’t anticipating.
  2. The Products and Completed Operations exclusion: Many cannabis companies were never informed by their agent or broker the policy doesn’t cover your product liability. If someone gets sick off your weed, you need to buy a separate insurance policy to cover the risk of product liability.
  3. The Breach of Contract Exclusion:  Cannabis insurance companies want to be certain their insurance policies are not covering broken promises with other parties through written or oral agreements.  Don’t plan on using your insurance for claims involving money owed to other parties because it didn’t work out between you.
  4. The total mold, mildew, and other fungi exclusion: Cannabis companies who are being sued by landlords or other parties might not realize no coverage exists for grow sites covered with mold or mildew.
  5. The Protective Safeguard Exclusion:  The reason certain cannabis insurance policies add this exclusion is to notify their clients of conditions you must follow for covering the actual cannabis products.  One cannabis carrier requires the safe to be bolted to the ground if it weighs between 800 lbs. to 2,000 lbs.  Many cannabis business owners will question the need to bolt a 2,000 pound safe.  This same carrier requires a 1 hour fire rating for your safe.  Don’t bother filing a claim if the safe was suppose to only last 30 minutes in a fire.
  6. The Limitation to Designated Premises or Project Exclusion:  This exclusion makes our list because it surprises many cannabis companies when they realize their insurance is specific to the locations listed on the insurance policy.  If you need your insurance to cover an offsite event, then this exclusion doesn’t provide the protection you need.  Many insurance brokers fail to realize the certificate of insurance they issued for the 420 event holder could be meaningless.  Many cannabis event holders are probably sitting on certificates of insurance that could be worthless.
  7. The Skin Tanning Exclusion:  This is not the worst, but simply the dumbest exclusion we’ve seen included on a cannabis general liability policy.  What does a skin tanning exclusion have to do with a cannabis company remains a mystery to most?

RICO Lawsuit Covered on Cannabis General Liability Insurance?

RICO Lawsuit Covered on Cannabis General Liability Insurance?

Insurance Committee Indicates RICO Covered by General Liability Insurance

A recent report issued by the National Cannabis Industry Association Finance and Insurance Committee (“committee”) indicates lawsuits filed under Racketeer Influenced and CorruptNCIA Insurance Committee Organizations Act (“RICO”) by a third party against a dispensary would be an example of a claim covered by a commercial general liability policy

These committees are a opportunity for members with particular expertise to volunteer and effect change. In April of 2018, the committee released their publication entitled “Protecting Your Cannabis Business: A Commercial Insurance Review” to educate the cannabis industry on types of coverages available, purpose of those coverages, and citing examples of when coverage would be offered.

Besides the RICO lawsuit, the committee cited other examples covered by general liability insurance include a customer who slips and falls, repairman bitten by a dog, and product disparagement claim brought by a competitor.

What is RICO?

RICO is a violation of United States Federal law enacted under U.S. Code Title 18 Chapter 96 of the Organized Crime Control Act of 1970.  There is a criminal and civil component to the statute.  The law specifies offenses known racketeering activities such as arson, bribery, extortion, gambling, murder, kidnapping, and dealing in a controlled substance such as marijuana that is part of ongoing criminal enterprise.

The party claiming RICO must be able to prove damages exist in addition to other important elements.  The injured party may sue in federal court and collect three times the damages they have sustained including the cost of the lawsuit.

Is a RICO Lawsuit considered Accidental?

Generally speaking, the purpose of commercial general liability policy is to offer coverage for the accidental, uncertain, and fortuitous losses to a third party.  This purpose has evolved over time, but remains a foundation to the history of insurance.  The cannabis licensee purchasing insurance is knowingly and intentionally operating a business in violation of federal law.  The RICO lawsuit will be a response by a third party due to the licensee’s conduct and does not appear accidental.

If the cannabis licensee’s conduct is certain and intentional, then cannabis insurance carriers might deny the claim based on this fact. 

Does a RICO lawsuit meet the Definition of an Occurrence?

In our experience, the sections below from a cannabis insurance policy may provide additional insight on how a RICO claim or lawsuit would be treated from a policy perspective.

The typical insuring agreement will state the following:

Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.

There are several key terms within the insuring agreement such as “for which this insurance applies” or “to which this insurance does not apply.”  This language seems insufficient to consider if a RICO claim would or would not be covered.

The insuring agreement does provide several conditions of which one condition would be noteworthy in our opinion as it pertains to this type of claim:

The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”;

Many insurance policies define occurrence to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  The insurance carriers and courts may evaluate closely if RICO meets the definition of an occurrence with emphasis on the word accident.  Various sources define accident as being unforeseen, unplanned, and unexpected that can be associated with acts of God.  Using the example cited by the committee, the operating dispensary whose neighbor files a RICO claim is a consequence of their licensed distribution of cannabis.

For most people, a lawsuit of this nature would be difficult to quantify as being in the same category of a car accident or customer falling in the parking lot.  Both of these events were uncertain.  The filing of a lawsuit isn’t accidental, but a legal response by a party who believes they’ve suffered harm due to a known violation of federal law. 

Is RICO excluded on the cannabis insurance policy?

Exclusions are specific policy language meant to inform the policy holder when coverage is not offered.  The insurance carrier’s “carve out” the risk they don’t want to cover.  We’re unaware of commercial general liability policies excluding RICO lawsuits.

RICO has been excluded in other cannabis insurance policies such as product liability and directors & officers insurance.

Is RICO covered or not? 

Based on our experience, we don’t see a clear path exists through a commercial general liability policy to offer coverage for RICO claims and lawsuits unless the committee has insurance carriers offering this type of coverage with policy language to support their claim.  Furthermore, there are cannabis insurance policies that may require the customer to reimburse the insurance company for the cost of the claim as a result of the loss not being covered.  This would be a harsh consequence for the cannabis licensee.

If RICO lawsuits are filed, the insurance carrier responsible for the claim may issue a reservation of rights letter to initially defend the lawsuit, while they determine if coverage should be offered through trial or settlement.   Reservation of rights letter are common practice used by claims departments to temporarily investigate a claim, while providing the carrier the right to terminate their obligations at any time. 

The first hurdle will be the insurance industry determining if a RICO lawsuit is an insurable risk due to the certainty of a cannabis licensee violating federal law. The second hurdle will be meeting the definition of an occurrence and accident.

NCIA Cannabis Insurance Overview

Buying Insurance in order to repel the Department of Justice

Buying Insurance in order to repel the Department of Justice

Buying insurance is a standard business practice for every industry

Cannasure Patrick McManamon

McManamon Source National Cannabis Industry Association

A recent article in the Marijuana Business Daily entitled “Finding right insurance is key to any marijuana company’s business plan” discusses how insurance is an important area of compliance and prudent for cannabis businesses to protect themselves from the Department of Justice. The article indicates more states are requiring cannabis insurance and went further by interviewing Cannasure Insurance Services’ Patrick McManamon who stated “Being in compliance is the main thing that we want to show the Department of Justice, and part of that is going to be insurance.”  McManamon shares an interesting perspective that insurance is about compliance and may fend off the Department of Justice. In our opinion, cannabis companies who buy insurance are simply being normal and responsible business owners.  It would be difficult to imagine the Department of Justice deciding if they should enforce federal marijuana laws to consider the procurement of insurance as a reason not to exercise their rights.  Regardless of the industry, every business buys insurance as a standard procedure.  Perhaps, the message to the cannabis industry is be responsible and buy insurance in order to meet the obligations to others.  Those others may include a state regulatory agency, landlords, employees, vendors, and the general public. 

 Will the insurance company pay out

The article indicates situations when insurance companies have sold policies only to result in claims not being paid citing Green Earth Wellness (“Green Earth”) versus Atain Specialty Insurance Company.  The  Green Earth lawsuit did result in Atain Specialty Insurance Company (“Atain”) raising the argument cannabis is federally illegal as one of the reasons to the deny the claim. Aside from the Green Earth lawsuit, there are policy exclusions mentioned in the article citing two as being the most common:  “Schedule 1,” “federally illegal” and “health hazard.” We reviewed cannabis insurance policies for these particular exclusions.  The “federally illegal” is most likely referencing the Business Personal Property policy excluding “Contraband, or property in the course of illegal transportation or trade.”   Essentially, the carrier has the right to not cover your property because of this exclusion.  The problem for insurance carriers who decide to use this as a reason to deny a claim may find themselves in litigation.  The Colorado court in Green Earth v. Atain recognized the ambiguity of the contraband exclusion, but relied on the mutual intentions by both Green Earth and Atain they were in the transaction together to buy insurance for a medical marijuana company.  In other words, there was no surprise by either party a contractual relationship is formed knowing one of the parties is distributing, manufacturing, and cultivating a controlled substance. Regarding the Health Hazard exclusion, there are product liability policies sold in the cannabis industry with a health hazard exclusion.  Below is a sample of the Health Hazard exclusion.  In our opinion, the inclusion of this language on a product liability insurance policy could result in coverage being denied based on a given set of facts or circumstances.  We don’t believe every product liability claim will be denied, but it does appear if cannabis is being used to contribute toward a health hazard, then coverage may be in jeopardy.

Sample Health Hazard Exclusion

Cannabis Health Hazard Exclusion

Health Hazard Exclusion–Possible Reason to Deny Coverage

Lastly, McManamon states when buying insurance “Vet that person like you would your attorney, your accountant. Once you find that agent, you really work with him and stick with him.” We couldn’t agree more.

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Cannabis Insurance Policy Conflict: Defense Costs vs Duty to Notify your Carrier

Cannabis Insurance Policy Conflict: Defense Costs vs Duty to Notify your Carrier

This article explores the issue of certain cannabis insurance policies that require their customer to notify the carrier of potential claims.  But, the same policy provides the insurance company the opportunity to collect money from their own customer the cost of a claim that may not be covered.

A serious dilemma has been created that doesn’t necessarily favor the cannabis business who bought the policy.   Insureds who own this type of policy will want to discuss it with their insurance broker

Competing policy provisions can create a real dilemma on what to do….

One particular cannabis insurance policy sold in the marketplace caught our attention because it included a condition and right by endorsement to allow the insurance carrier the opportunity to recover the legal expense for claims that may not be covered.  In plain language, you file a claim that isn’t cover, you may owe money to the insurance carrier.  Please note, we don’t offer this insurance carrier.

We don’t know if this policy is still being offered in the marketplace.  The type of insurance coverages included Commercial General Liability, Personal and Advertising Injury, and Products and Completed Operations was excluded.  The policy form is a CG 00 01 04 13.

The way we interpret this condition and right, it essentially means the opportunity exits for the insurance carrier to collect the money spent on legal fees for claims not covered by the policy.  Basically, a customer files a claim with their insurance company.  The insurance carrier offers to pay for the lawyers to represent that customer.  After a investigation, the claim is not the type of loss meant to be covered on the policy.  The insurance carrier requests reimbursement of the money spent on legal fees from the customer creating a difficult circumstance for the client.

Below is the policy provision requesting reimbursement of defense costs for claims that may not be covered:

WASHINGTON CHANGES DEFENSE COSTS

If we initially defend an insured (“insured”) or pay for an insured’s (“insured’s”) defense but later determine that none of the claims (“claims”), for which we provided a defense or defense costs, are covered under this insurance, we have the right to reimbursement for the defense costs we have incurred.

The right to reimbursement under this provision will only apply to the costs we have incurred after we notify you in writing that there may not be coverage and that we are reserving our rights to terminate the defense or the payment of defense costs and to seek reimbursement for defense costs.

An analysis of the language being used offers to initially defend the insured for their legal defense.  However, it is later determined “that none of the claims….” are covered on the policy, they have a right to reimbursement of those defense costs.  The insurance carrier must notify the insured in writing there “may not be coverage” with other rights being reserved.  The scope of this provision appears limited to defense and defense costs.

The question a client and agent who sold this type of policy must ask themselves is if filing a claim or incident going to trigger this right by Hannover to collect money owed for legal expense?

Sorting through two different and competing policy provisions is thorny for most customers

There is another issue a client and insurance broker must ask themselves :  Isn’t there a duty or obligation of the policy holder to notify the insurance carrier of any claim?  Most insurance policies include a notification to the insured they have a duty to notify the insurance carrier of potential claims.

Duties In The Event Of Occurrence, Offense, Claim Or Suit:

You must see to it that we are notified as soon as practicable of an “occurrence” or an offense which may result in a claim. To the extent possible, notice should include:

(1) How, when and where the “occurrence” or offense took place;
(2) The names and addresses of any injured persons and witnesses; and

The duties section requires the customer to notify the insurance carrier “which may result in a claim.”  The word “may” becomes crucial because the possibility does exist depending on the fact pattern of the claim.  Most retail insurance brokers will likely suggest to their clients to file a claim and avoid the risk of a claim being denied for failing to notify the carrier in a reasonable time period.

A dilemma exists between these two provisions:  Changes Defense Costs and Duties In The Event Of Occurrence, Offense, Claim Or Suit because they appear to be in direct conflict with each other.   Are you obligated to file or not?  Each claim or incident has a unique set of circumstances and facts.  The ability to determine which claim should or should not be filed with a insurance carrier is nearly impossible to predict leaving the insured and their insurance broker in a quagmire.

Uncertain if these conditions and rights have been enforced in the marketplace. 

If the Changes Defense Cost provision is still being used in the marketplace, we’re unaware if it has been enforced by this carrier.  Another point of consideration would be the insurance carrier’s intent for using the Changes Defense Cost condition.  This means the carrier may have included this condition and right as a means to avoid frivolousness claims from being filed.  This is strictly speculation as we had no knowledge when their insurance policy was being formulated and drafted.

If you have this type of provision, you may want to discuss with your insurance broker if it can be removed or has it ever been enforced.