Article
Source: Law.com
Article
06.15.20
During the widespread unrest in the wake of the killing of George Floyd, looters appear to have specifically targeted cannabis dispensaries for theft and vandalism. It has been reported that 43 businesses in California and Oregon were essentially destroyed, as well as dispensaries in Boston and Chicago that had only recently opened. The Bay Area was particularly hard-hit, with industry sources reporting that nearly every pot retailer in Oakland was targeted, along with most dispensaries in San Francisco and Berkeley. Many of these businesses were already suffering from the economic impact of the COVID-19 pandemic — and may not have qualified for federal aid due to the federal illegality of marijuana — and they may now be teetering on the edge of financial ruin as a result of the recent wave of property damage, theft of inventory and cash, and further business interruption.
Fortunately, insurance coverage is potentially available to defray costs associated with these losses. Despite the historic difficulties faced by legal cannabis businesses in obtaining insurance — due to, among other factors, the reticence of insurers to underwrite the risk, and the industry’s lack of access to credit and other financial institutions — the situation has improved in recent years due to increased legalization of marijuana at the state level and the approval of cannabis-specific insurance products by regulators such as the California Department of Insurance. Thus, whether through California’s CannaBOP insurance program or otherwise, affected dispensaries may have coverage in place to respond to looting-related loss. While coverage will, of course, depend on the facts of the loss and specific language of an insured’s policy, generally speaking, the standard commercial property policy does not appear to contain exclusions or other limitations that present an absolute bar to coverage for these losses.
Commercial property insurance covers property damage and business interruption. The former category includes costs associated with repairing damage to the premises, repairing or replacing damaged or stolen business property (e.g., computers, security equipment, display counters and other furniture), and the value of lost inventory. Importantly, coverage may also be available for measures taken to safeguard insured property from further damage, including increased costs associated with security and surveillance, fire protection, and moving inventory to a secure location. Often, policies include express coverage for such “protection and preservation of property,” but even when that is not the case, courts in many jurisdictions have recognized that loss mitigation efforts are covered. (Additionally, policies typically require insureds to undertake such efforts to the extent feasible and reasonable.)
To the extent that dispensaries had to close due to the looting, lost business income may also be covered. Of course, nonmedical dispensaries in some states were already shuttered as “nonessential” businesses during the pandemic. But in California, Oregon, Washington, Colorado, Michigan, Illinois, and elsewhere, even recreational dispensaries were deemed “essential.” When doors are closed while repairs are underway, or due to the inability to operate for lack of inventory, commercial property policies cover such business interruption. Additionally, periods of interruption associated with measures to protect and preserve property from further damage may also give rise to coverage, sometimes styled in policies as “Protection and Preservation of Property Time Element.” Policies may also cover economic loss resulting from an order of civil authority preventing access to the business. For example, if government-ordered curfews in certain cities forced dispensaries to close earlier than normal, the revenues or profits that would otherwise be earned may be covered.
To be sure, cannabis dispensaries will likely face challenges to coverage posed by their insurers. On the property damage side, commercial policies often purport to exclude loss of cash. Since many, if not most, dispensaries are cash-only businesses, insurers may invoke such exclusions if relevant to the loss. As to stolen or damaged inventory, there may be valuation challenges due to the fact that marijuana products are regulated differently in each state in which they are legal, and replacement cost may be affected by disruptions to the stream of commerce caused by the COVID-19 pandemic.
On the business interruption side of things, loss measurement is complicated by the fact that many of these dispensaries are relatively new businesses (or operate in jurisdictions in which the sale of cannabis has only recently been legalized), thus, there may be little benchmark data for the purposes of projecting lost business income during a period of closure. Additionally, insurers may attempt to reduce the amount of covered loss by applying “loss of market” or “loss of use” exclusions, or similar concepts, to argue that dispensaries affected by looting were already experiencing a drop in business due to the pandemic. Therefore, they may argue, loss of income due to looting must be parsed out from already ongoing business interruption. Insureds should take care that they are not blindsided by this type of accounting exercise.
Another potential roadblock is the insurance industry’s occasional attempt to argue that coverage for cannabis-related loss is barred by a criminal conduct exclusion or the supposed “uninsurability” of cannabis-related risk due to the drug’s continued illegality under federal law. Hopefully, with increasing legalization at the state level and availability of specialized cannabis insurance products approved by state regulators, these arguments will fall by the wayside. But incredibly, some insurers have denied coverage on these grounds under policies that they knowingly issued to cannabis businesses. Thankfully, some courts have seen through such gamesmanship. See, e.g., Green Earth Wellness Center v. Atain Specialty Insurance, 163 F.Supp.3d 821 (D. Colo. 2016) (rejecting insurer’s argument that grower’s damaged marijuana inventory constituted illegal contraband or was uninsurable as against public policy). Eventually, federal legislation such as the CLAIM Act (which provides a safe harbor for insurance companies servicing legal cannabis-related businesses), if and when passed, may effectively quash the viability of such coverage defenses.
Dispensaries experiencing loss as a result of recent looting can be hopeful that there is potential coverage, but they must also prepare to “prove up” their claims and respond to their insurers’ anticipated defenses to coverage. It is recommended that affected dispensaries take the following first steps immediately: