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.