While certain of those considerations (i.e., the regulatory framework) are Pennsylvania-specific, many of the same considerations apply to medical-marijuana-related businesses operating in any state where medical marijuana is legal. And while certain of those considerations apply specifically to medical-marijuana dispensaries, many of the same considerations also apply to medical-marijuana growers/processors and potentially other medical-marijuana-related businesses.
Regulatory Framework: Pennsylvania requires that medical-marijuana dispensaries “obtain and maintain an appropriate amount of insurance coverage that insures the site and facility and equipment used in the operation of the facility.” 28 Pa. Code § 1141.44(a). “An adequate amount of comprehensive liability insurance covering the [dispensary’s] activities authorized by the permit shall begin on the date the initial permit is issued by the Department and continuing for as long as the [dispensary] is operating under the permit.” Id. Pennsylvania also requires that all dispensaries “obtain and maintain workers’ compensation insurance coverage for employees at the time the [dispensary] is determined to be operational by the Department.” 28 Pa. Code § 1141.44(b).
Risks: A medical-marijuana dispensary is at risk for both third-party and first-party losses. For example, a product liability claim could be made against it. The dispensary could be sued by a third party, alleging bodily injury caused by a product defect, inadequate labeling of a product, or a failure to warn of the dangers of a product. Someone could slip and fall in the dispensary. Or, the dispensary could suffer a fire or other property damage, which could result in temporary closure or other disruption of its business. Additionally, because the medical-marijuana industry is largely, if not exclusively, a cash industry, a dispensary could be at an increased risk for theft. A medical-marijuana dispensary also could experience a data breach or a product recall. It could also be raided by law enforcement. As with any other business in any other industry, the potential risks are simply too many to list.
Insurance Coverages: Various types of insurance coverage may be necessary or at least valuable to medical-marijuana dispensaries. They include commercial general liability coverage, property/business interruption coverage, professional liability coverage, product liability coverage, product recall coverage, and cyber coverage. At least one insurer is also offering raid insurance, which provides coverage in the event that a dispensary complying with state law is raided by law enforcement but absolved of any related charges. Additionally, in Pennsylvania, workers’ compensation insurance is required.
Insurance Market: Not many, if any, traditional insurers are writing insurance for businesses in the medical-marijuana industry. Lloyd’s of London stopped in 2015. As such, medical-marijuana dispensaries, like other entities doing business in this industry, will likely need to look to insurers and brokers who specialize in insuring the medical-marijuana industry.
Enforceability of Insurance Policies: While medical marijuana has been legalized in Pennsylvania, it is still illegal under federal law. In light of this tension, federal courts have split on whether to enforce insurance policies in the event of a claim for a medical-marijuana-related loss. In Tracy v. USAA Casualty Insurance Company, No. 11-00487 LEK-KSC, 2012 WL 928186, at *13 (D. Haw. Mar. 16, 2012), the U.S. District Court for the District of Hawai’i refused to enforce an insurance-policy provision “because Plaintiff’s possession and cultivation of marijuana, even for State-authorized medical use, clearly violates federal law.” Therefore, in 2012, that court concluded that “[t]o require Defendant to pay insurance proceeds for the replacement of medical marijuana plants would be contrary to federal law and public policy.” Id. However, four years later, in The Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company, 163 F. Supp. 3d 821 (D. Colo. 2016), the U.S. District Court for the District of Colorado rejected the same public-policy argument. It found that “both parties had a mutual intent to treat marijuana products as insurable commodities.” Id. at 834-35. Declining to follow Tracy (“particularly in light of several additional years evidencing a continued erosion of any clear and consistent federal public policy” concerning the legalization/criminalization of marijuana), that court stated that the insurer, “having entered into the Policy of its own will, knowingly and intelligently, is obligated to comply with its terms or pay damages for having breached it.” Id. at 835. On which side of the case-law divide federal and/or state courts in Pennsylvania will come down remains to be seen.
How Reed Smith Can Help: As always, it is important to consult with attorneys who are knowledgeable in this area. Our Insurance Recovery Group attorneys can help medical-marijuana dispensaries, as well as other businesses in the medical-marijuana industry, address each of these various considerations.
Client Alert 2017-155
