Insurance is a key part of any business (or home). That is no less true in cannabis and several insurers—at least on West Coast—provide insurance for marijuana businesses as well as hemp. The barriers to purchasing insurance related to hemp, of course, decreased substantially following the enactment of the 2018 Farm Bill. But purchasing an insurance policy, as most of us know, is not the same as having coverage for certain kinds of losses.
A recent Oregon federal case illustrates the kinds of questions that insureds, insurers, and courts may face in the coming years. Plaintiffs owned a home in Grants Pass, Oregon, (the “Property”) which was insured by homeowner’s policy (the “Policy”). Among the coverages provided were damages for losses caused by fire to the Property. In early January 2019, a fire caused significant damaged to the Property while one of the homeowners was in his garage making a salve from cannabis containing cannabidiol (“CBD”) from hemp.
Plaintiff’s insurance company denied coverage for the loss under a controlled substances exclusion (the “Exclusion”). The Exclusion provided that that the Policy did not cover:
Loss or damage arising out of the use, sale, delivery, transfer, possession, growing, production, processing, warehousing, transportation, or manufacturing, by any “insured” or with any “insured’s” knowledge, of a controlled substance, as defined by the Federal Food and Drug Law at 21 U.S.C.A. Sections 811 and 812 (as amended), regardless of whether the controlled substance is legal under any state law (for example: marijuana).
The cannabis here involved hemp harvested in 2017 and 2018. In November of 2017, the hemp harvested that season was found by an independent lab to have a “total THC” level of .381% by weight. The hemp harvested in 2018 was found by that same lab to have a “total THC” level of .259%. The actual levels of delta-9 THC present in both samples was essentially nil.
As is typical in insurance coverage actions, both sides moved for summary judgment making arguments primarily centered on the policy language. The insurer asserted that the homeowner’s activities constituted the processing of a controlled substance and, therefore, the loss was excluded by the Policy. Specifically, insurance company argued that the 2017 hemp harvest contained a total THC level above .3% by dry weight making it marijuana, not hemp and thus a controlled substance. Plaintiffs naturally disagreed, arguing that “total THC” has nothing to do with the definition of controlled substance in the Policy.
The court agreed with the homeowners. The court expressly noted that an insurer bears the burden of establishing the applicability of an exclusion to coverage. The core of the dispute, said the court, is whether it should consider only the actual level of delta-9 THC in the 2017 hemp, effectively zero, or the “total THC” level of .381%. The Policy defined “controlled substance” pursuant to 21 U.S.C. §§ 811 and 812. Those statutes, the court explained, are only concerned with the concentration of delta-9 THC and make no reference to the level of THCA, an entirely different cannabinoid that is a precursor to delta-9 THC. Further, although Oregon law references “total THC” the calculation thereof, the Policy made no reference to Oregon regulatory standards.
At best, said the court, it is ambiguous whether THCA should be considered at all. Even if it were, the statutes provide no standard for converting THCA to delta-9 THC by decarboxylation. And the regulations that do provide such a standard were not in existence at the time of the loss and were not incorporated into the definitions found in the Policy.
The court concluded that the Policy, by its plain terms, uses the unadorned statutory definition of hemp as containing .3% delta-9 THC by weight. Here, the actual level of delta-9 THC present in the hemp was below that threshold, and increased only by including a conversion of THCA. Since both samples contained less that .3% delta-9 THC, the hemp was not a controlled substance and the exclusion did not apply.
This is a good win for the homeowners and a well-reasoned decision consistent with the principles of insurance coverage law. Unfortunately, insurance companies may respond by amending their policy definitions to make the total THC requirement explicit.
For more on cannabis insurance, check out the following:
- Hemp Insurance Litigation: Oregon Federal Court Rules Insurer Has No Duty to Defend or Indemnify Hemp Farmer for Plant Loss
- Anatomy of a Cannabis Insurance Policy, Part 1: The Basics
- Anatomy of a Cannabis Insurance Policy: Exclusions
- Cannabis Business Basics: Liability Insurance is a Non-Negotiable Priority
- Cannabis and Insurance Litigation
- Yes, Washington, You Really Need Cannabis Business Insurance