What can be Learned from the only Lawsuit filed by a Cannabis Company against their Insurance Carrier

Dispensary Green Earth Wellness against Atain Specialty Insurance

The cannabis industry has experienced few lawsuits involving a cannabis operation suing their insurance company.  We’re aware of just one  and it occurred when Green Earth Wellness Center (“Green Earth”) of Colorado Springs, Colorado filed a lawsuit against their insurance carrier Atain Specialty Insurance Company (“Atain”) back on December 20, 2013. The case is filed in the United States District Court for the District of Colorado entitled The Green Earth Wellness Center LLC, Plaintiff v Atain Specialty Insurance Company, Defendant Civil Action No. 13-CV-03452-MSK-NYW.

Green Earth believed insurance coverage existed for living cannabis plants damaged by smoke from a nearby wildfire known as the Waldon Canyon Fire.  That smoke damage made those plants essentially worthless.  Green Earth claimed $200,000 to their grow facility primarily mother plants and clones and $40,000 in damage to buds and flowers.

Green Earth is a small business licensed by the State of Colorado to produce and sell medical marijuana from two locations. Atain is part of a large insurance empire known as the H.W. Kaufman Group that includes a subsidiary named Burns & Wilcox with over $1 Billion in premium written.  Burns & Wilcox represented Atain as their licensed wholesaler underwriting Green Earth’s request for insurance. 

Court records show Green Earth purchased through a retail insurance broker introduced by Burns & Wilcox.  The policy included commercial general liability and business personal property.  For those who may be unfamiliar with insurance, commercial general liability covers liability for a variety of reason related to your business and premise.  The commercial general liability was never the issue during the lawsuit because no liability existed from a third party.  The lawsuit was seeking payment for the property damaged by smoke.

Green Earth Wellness focused on the Definition of Stock

If coverage for a living plant was to be available, Green Earth would focus on the business personal property coverages because this is where a policy offers coverage for “things” a business owns.  A cannabis company will own a variety of things such as grow equipment, computers, lighting, hvac systems, and cannabis.  That cannabis might be alive or cured depending on the stage of production.  If coverage is to exist, Green Earth would review their insurance policy for important terms and conditions to lead them in the right direction. 

One of those terms most likely to catch the attention of Green Earth was the word “Stock.”  The insurance policy defined stock as

“merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.” 

It was the “raw materials and in-process or finished goods” Green Earth believed their living cannabis plants fall neatly into this definition.  Many people reading this definition would consider this to be plausible.  Marijuana clones will eventually mature into budding plants.  Those buds are the raw materials for a variety of finish products such as joints, concentrates, and edibles. 

However, most insurance industry professionals with experience in cannabis insurance during this time period would have known stock was never meant to cover living plants on the business personal property policy.  This would have been difficult for Green Earth to know, unless they had been working with an experienced retail insurance broker.  In 2012, there may have been one insurance carrier offering crop insurance to the cannabis industry during this period of time.

Green Earth believed coverage was purchased because of a medical marijuana crop application had been completed

Court records show a medical marijuana crop application was part of the underwriting process.  How this form became part of the application process was murky by Green Earth and others deposed.  A typical application will include standardized forms known within the insurance industry as Acord forms.  Court records indicate Acord form numbers 125, 126, and 140 were submitted by the retail insurance broker to Burns & Wilcox. 

Quite possibly, the medical marijuana crop application was part of another submission to a different insurance carrier and was inadvertently included with the submission to Burns & Wilcox. 

Green Earth Wellness Marijuana Crop Application

Medical marijuana crop application

Regardless, the fact a medical marijuana crop application was part of the underwriting file showed the possibility crop insurance was part of the insurance request. 

The quote stated “Coverage does not extend to growing or standing plants.”

The quote and binder issued by Atain to Green Earth both stated “Coverage does not extend to growing or standing plants.”  Most business owners contemplating the purchase of insurance are likely to read this statement and decide quickly this policy is not the right choice.

Atain Insurance Quote for Green Earth Wellness

Court records indicate the retail insurance broker reviewed the insurance quote with Green Earth.  Those same records further indicated neither the retail insurance broker and Green Earth having any recall of discussing this important disclosure.  Atain had every right to believe they were not offering coverage for living plants.

Clear communication is essential during the procurement of insurance with the cannabis industry

Clear communication is a foundation in having good business relationships.  Insurance is a complicated product that should be sold by experienced professionals with a good understanding of important terms and conditions.  The Green Earth lawsuit could have been avoided if evidence existed to demonstrate a mutual understanding of the coverages being purchased by those parties involved.

 

 

 

 

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.