Compelled by a suggestion from an avid reader of this blog, this post looks at how courts have dealt with medical marijuana claims under residential policies of insurance.

Very recently, in Tracy v. USSA Casualty Insurance Company, a Hawaiian federal court found for USAA in a marijuana plant loss claim. The court ruled that an insurer has no obligation to pay for stolen marijuana plants because the use of marijuana for medical purposes is still illegal under the Federal Controlled Substances Act (CSA).

In Tracy, the policy of insurance provided coverage for "trees, shrubs and other plants on the premise." The insured, who was permitted by the state of Hawaii to possess and grow marijuana for medical use, submitted a claim under her homeowners policy for 12 stolen marijuana plants, which were valued at $45,600. USAA initially paid $8,801 on the claim, but Tracy filed suit for the full value of her plants. Tracy argued she had an insurable interest in the property and that the use was legal under Hawaii law.

USSA argued that although legal for medical purposes under Hawaii state law, marijuana possession is illegal under federal law. USSA also claimed Tracy had no insurable interest in the marijuana because it would be illegal to use insurance proceeds to purchase the replacement marijuana, and that requiring insurers to cover marijuana plants would violate federal public policy.

While the court agreed with Ms. Tracy that she had an insurable interest in the plants, the court granted USAA’s motion for summary judgment. The violation of federal law preempted the state law and invalidated the insurance coverage. The contract for insurance for an illegal item made the contract illegal and unenforceable.

California’s Fourth District Court of Appeal has also ruled on insurance coverage for marijuana plants. In Barnett v. State Farm General Insurance Company, the court ruled that the police officers taking and destroying marijuana plants was not a covered theft loss under the policy.

In Barnett, the loss of the plants occurred when police, armed with a warrant, came to the property and seized 12 seven-foot tall marijuana plants, freezer bags containing approximately five ounces of marijuana, and a tray with loose marijuana and rolling paper. Barnett was not initially charged with a crime and he argued that he had the marijuana for approved medical purposes. He believed his cultivation and possession of the marijuana met the terms needed in California under the Compassionate Use Act (CUA). The opinion noted that Barnett had more marijuana than what is typical for medical purposes, but Barnett alleged he had doctor authorization.

The police seized the property and then later destroyed it in a mass burn.

Barnett filed a claim with his insurance company, but State Farm failed to provide coverage. Just as we saw in last weeks post, the court looked at the meaning of the terms in the policy. The policy terms "theft" and "stolen" were not defined, so the court looked to the ordinary meaning of the words. The court held that to qualify as a theft, the items claimed under this policy had to have been taken as part of a felonious taking or with a criminal intent to steal.

The court agreed with the insurance company that a "theft" under the policy did not occur at the Barnett property because the officers were not engaging in a felonious taking and they did not have an intent to steal the marijuana. The police were just doing their job. The court used the analogy where a wrong car is impounded. The impoundment is also not a theft because of the lack of intent. Based on this analysis, the court concluded a theft loss did not occur at the property.

Barnett struggled with this analysis because he cited authority that supported the theory that a theft loss was “a taking of property belonging to another without authority." He coupled this definition with his assertion that the actual warrant for search and seizure was improper, but the court was not persuaded that the drugs were covered.

A Washington Court faced with a different set of facts ordered an insurance company to pay for the loss to residential property for damage caused by marijuana. In the case of Kochendorfer v. Metropolitan Property & Casualty Insurance Company, individuals renting the house from the insured operated a marijuana grow operation and caused a fire by tampering with the electrical panel. In accordance with the policy of insurance, an appraisal panel met to set amounts of loss for property damage. The insured sought judicial confirmation of the unanimous appraisal decision in the amount of $311,270.58 in replacement cost value and $240,077.05 in actual cash value. Metropolitan did not pay the award, contesting the loss of use payment, code upgrades, and associated costs in the amount of $53,316.57 for compliance with environmental cleanup protocol including clean up of the mold caused by the marijuana grow operation.

The court ruled in favor of the insured with respect to all three areas of dispute, explaining that that Metropolitan essentially conceded the award should be paid because it did not contest the validity of the appraisal, but rather the extent or the amounts allocated in the award.

How will other courts evaluate cases where marijuana is either stolen or causes damage to property? Only time will tell — but these are interesting issues that were probably never considered by the original insurance gurus.