Insurance coverage in the modern world is ubiquitous, particularly in the business context.  The need for insurance will soon confront legalized medical marijuana operations under Michigan’s Medical Marihuana Facilities Licensing Act (MMFLA).

That law, which will become operative on December 15, 2017, contains insurance requirements that must be met by licensees to obtain and maintain their licenses in Michigan.

Marijuana facility owners and developers, marijuana business lawyers, state regulators, and insurance executives and counsel, among others, have begun to ask precisely what insurance coverage will be required by the state and who is willing to provide it.

Is the insurance industry ready to meet the December 15 deadline? Are a sufficient number within the industry willing and able to participate in the marijuana industry? Do carriers and underwriters know what they need to know to issue policies?

Scope of Coverage

What types of coverage may be required by the MMFLA? Four different sections of the law are applicable:

• First, under section 408(1), the applicant for a license must demonstrate “. . . proof of financial responsibility for liability for bodily injury to lawful users resulting from the manufacture, distribution, transportation, or sale of adulterated marihuana or adulterated marihuana-infused product in an amount not less than $100,000.00.” This proof may be provided in several ways, including by “. . . a liability insurance policy.”
• Second, section 402(2)(e) provides that an applicant is ineligible for a license if “[t]he applicant fails to demonstrate the applicant’s ability to maintain adequate premises liability and casualty”
• Third, section 303(1)(j) empowers the Licensing Board to “[c]onsult with the Licensing and Regulatory Affairs (LARA) as to appropriate minimum levels of insurance for licensees in addition to the minimum established under section 408 for liability insurance.”
• Finally, section 206(b) empowers LARA, in consultation with the licensing board, to “. . . establish minimum levels of insurance that licensees must maintain.”

Thus we know that the law requires bodily injury liability insurance, and premises liability and casualty insurance, but we do not know what other types of insurance LARA and the licensing board may require for a licensee.  Insurers who wish to enter this market must therefore proceed for now without a complete picture of the needs of the Michigan licensees.

Availability of Insurance

As the pace of state legalization of marijuana grew, Lloyd’s of London allowed its subscribers to underwrite insurance for some participants in the marijuana industry. However, in 2015 Lloyd’s announced it would no longer support insuring marijuana operations of any kind until marijuana is formally legalized by the U.S. government.

Is the void left by Lloyd’s departure being filled? A quick Google search for “marijuana insurers” indicates there are companies advertising their willingness to serve this market. Under the Michigan listings there are eight “providers.”  However, only four of the eight appear to actually be involved in the insurance business.  The other four are not insurers (one was a domain name for sale).  And it’s not clear that these remaining four are offering insurance in Michigan.

Enforceability of Contracts

The enforcement of an insurance policy for a marijuana-based claim raises issues because of the federal law prohibition of marijuana.  Some courts may decline to enforce a contact that is illegal or contrary to public policy.  Two recent court decisions illustrate the problem.  In Barbara Tracy v. USAA Casualty Insurance Company, a Hawaii federal court concluded that it could not require the insurer to pay to replace stolen marijuana that was illegal under federal law.  Green Earth Wellness Center v. Atain Specialty Insurance Company, a Colorado federal court case, reached a different result and upheld policy coverage.

Other defenses to payment can arise out of the secretive way state-legal marijuana activity may be conducted, depriving the insurer of complete knowledge. In Nationwide Mutual v. McDermott, the insurer paid a house fire claim by a Michigan policyholder. The insurer later sued the insured to get their money back because it discovered the fire was caused when fumes from a marijuana butane extraction process started the fire. Nationwide was allowed to pursue the claim against the homeowner because the fire was the result of an undisclosed hazard within the insured’s knowledge and control.

Potential Criminal Liability

Insurance agents, brokers and carriers who choose to provide services to state-legal marijuana actors (business or personal) recognize that their activity could trigger liability under federal criminal law.  While anecdotally it seems that the risks of federal enforcement are limited, they are not zero.  This risk will certainly prevent some insurance industry participants from covering this market.

Nationwide repeal by states of marijuana prohibition seems likely to continue. With legitimacy comes acceptance, which will invite insurance coverage for many facets of legalized activity.  Michigan will require certain mandatory insurance, so there will definitely be customers.  The question remains: Who will serve those customers?