If you are suing your cannabis insurer, read this first. The venue in which you plan to file is of the utmost importance.

The status of marijuana as a schedule I narcotic has made cannabis insurance litigation a bit of a chess match. Many cannabis businesses enjoy the benefits of state legalization and the ability to freely insure their operations. However, this does not impact the strictures of federal law.

One underappreciated challenge arising from this conflict in laws is choosing where to sue an insurer that will not honor its obligations under a cannabis insurance policy. The wrong choice could doom a lawsuit from the start.

Choosing your battleground

Typically, a litigant has a choice between suing in state or federal court. The first key jurisdictional elements is where each party is located. The second is where each party does business.

Federal court litigation, if available, can have many advantages. These include the ability to sue your insurer outside of their “home court” (where they are located), or in a jurisdiction that is more canna-friendly. At the very least, a non-cannabis litigant can choose: state or federal? Canna litigants, though, would be wise to add an additional layer to their decision.

Federal courts hearing an action based on diversity jurisdiction typically apply the law of the state applicable to the dispute. A court determines the applicable law by: 1) examining a choice of law clause in a contract or 2) evaluating which state has the most significant relationship with the dispute.

For example, an insurance contract between a cannabis business and an insurer may provide that Washington law applies to any disputes. Absent a choice of law provision, the location where most of the insured activity took place will likely dictate which law applies.

But how have federal courts reacted to applying canna-friendly state law in a forum where federal law preempts underlying state concerns? The answer is inconsistently.

Courts are split on enforcing cannabis insurance contracts

In 2012, a Hawaii District Court issued a problematic ruling for the cannabis industry. The Court held that although the cannabis business policyholder had an insurable interest in marijuana, it was precluded from colleting on the policy. The Court reasoned that doing so would violate federal law.

Four years later, in 2016, a Colorado District Court held the opposite. That Court held that the insurable interest could be enforced. The Court reasoned that the insurer entered into the policy knowingly and willingly, fully intending to enjoy the benefits of Colorado state law as well.

Where we go from here

This dichotomy has forced cannabis business policyholders to carefully evaluate where to sue their insurers. Arguably it robs cannabis companies of some of the benefits of being in federal court. Note that even outside of the context of cannabis insurance litigation, federal court can be dicey for cannabis businesses.

The law is not yet fully settled on this issue. Therefore, if you are in a dispute with your insurer, choose your battleground wisely. Harris Bricken’s coverage lawyers have experience litigating disputes with insurers in both state and federal courts. We can assist with this evaluation.

Re-published with the permission of Harris Bricken and The Canna Law Blog