You can’t make this stuff up. A marijuana grow house goes "up in smoke"1 and I get to write about it in a property insurance blog! Nationwide Mutual Fire Insurance Company may be off the hook after a recent ruling from the Sixth Circuit Court of Appeals that there is no coverage for the fire loss because the policyholder failed to notify Nationwide they had converted the basement to a marijuana grow house.2
It’s a very interesting case—and I must note it is the first property insurance case that my wife Maria took it upon herself to read about when she saw the case summary and heading in my notes at our house. With my wife’s interest peaked, I was hopeful that I picked out a good topic. That’s because it involves a hot topic in the news and debate right now—medical marijuana.
Michigan is one of the growing number of states that allows licensed medical marijuana operations for patients and caregivers. The policyholders (husband and wife) bought a home in Michigan and obtained a homeowners policy from Nationwide. A few years later, the husband became a licensed medical marijuana patient and caregiver and spent a lot of money purchasing equipment to grow marijuana in the basement of the house. One thing led to another for the husband, and he started practicing a process called butane extraction, which draws liquid out of diced marijuana leaves to produce a THC-rich "honey oil."
On the date of loss, the husband was multitasking—performing butane extraction and smoking honey oil—when the butane ignited and the house and their belongings burned to the ground. The Nationwide policy excluded coverage for intentional acts of insureds and acts that occur when a hazard was increased by means within the control of an insured. The policy also required the insureds to notify Nationwide of any change possibly affecting the premium risk under the policy including changes in occupancy or use of the home.
Nationwide initially paid the wife over $160,000 for the loss, but then sued her in Michigan federal court arguing the policy did not cover the claim and seeking the return of the money through subrogation. The trial court found she was barred from recovery by the increased hazard exclusion. In the appeal, the wife argued that she was an innocent co-insured entitled to coverage despite her husband’s actions. Nationwide argued in addition to those from below, that she failed to report the change in the use of the basement to Nationwide. The appellate court agreed with Nationwide and stated that to find in the policyholder’s favor would make it liable for a risk it did not assume–the grow operation.
I would be interested to hear the story of the owner of a medical marijuana grow operation that notified their insurance carrier of their grow operation—were they able to keep coverage in place; was there a different premium charged? Something tells me that concept might not be up for consideration for another Cheech and Chong flick.
1 Up In Smoke was Cheech And Chong’s first feature length film in 1978.
2 Nationwide Mutual Fire Ins. Co. v. McDermott, No. 14-1623 (6th Cir. 2015).