Hunton Insurance Recovery Blog

Last month, we reported on the ongoing insurance coverage dispute between commercial landlord KVP Properties, Inc. and its property insurer, Westfield Insurance Company. The dispute arises from an October 2015 DEA raid on KVG-owned rental units in Novi, Michigan, which uncovered damage to the units related to the tenants’ marijuana growing operations. The arguments raised by KVG on appeal highlight a number of important marijuana-related coverage issues, which Westfield has now addressed in opposition.

Westfield’s brief raises important issues under conflicting state and federal marijuana laws, underscoring the need for policyholders to carefully evaluate the confluence of state and federal law when seeking to insure marijuana operations that may be legal under state law.

For example, Westfield contends that the criminal and dishonest acts should apply where the act at issue is either “criminal” or “dishonest” and that the exclusion therefore applies to marijuana operations if they involve elements of dishonesty, such as where the operations are undertaken in secret to avoid federal law. Westfield argues that the KVG tenants’ “dishonesty” and its causal relationship to the damage is undisputed where “KVG asserted the tenants were dishonest about what businesses they would be conducting, KVG did not give them permission to grow marijuana on the property, and all the alterations were done surreptitiously.” Westfield’s contention is a reminder that, while each insurance claim turns on the facts and specific policy language at issue, policyholders should not assume that legality under state law will necessarily insulate such conduct from the ambit of broadly worded conduct exclusions, where such exclusions still may be triggered under potentially applicable conflicting federal law.

Westfield attempts to altogether sidestep the conflict between state and federal law by contending that coverage is barred based on “vandalism” of covered property, arguing that the tenants’ intentional destruction of property constitutes a criminal misdemeanor thereby triggering the policy’s criminal acts exclusion. As Westfield argues, “[b]ased on KVG’s own admissions and contentions, even if caused by ‘vandalism,’ the damages were caused or resulted from a criminal act and are excluded.” Similarly, Westfield argues that the probable cause supporting the DEA’s ability to secure a search warrant was somehow sufficient to demonstrate the illegal acts necessary to invoke the policy’s criminal acts exclusion, and that this showing was made irrespective of whether anyone was actually convicted of a crime under federal law.

The ongoing conflict between state and federal law concerning the legality of marijuana cultivation operations will continue to serve as a battleground between insurers and policyholders over whether broadly or vaguely-worded policy exclusions may be relied upon to bar coverage where the operations at issue are legal under one body of law but not the other. This conflict highlights the need for policyholders to insist on narrowly tailored and clearly worded language in their policies, particularly where those policies pertain to property or operations in jurisdictions that have legalized the use and possession of marijuana.