Reed Smith Client Alerts

As anticipated, the U.S. Court of Appeals for the Sixth Circuit’s recent decision in K.V.G. Properties, Inc. v. Westfield Insurance Company, No. 17-2421 (Aug. 21, 2018), is unlikely to negatively affect the legitimate U.S. cannabis industry. Although, the Sixth Circuit held that the "Dishonest or Criminal Acts Exclusion" in “a standard first-party commercial insurance contract” precluded coverage for damage to a policyholder’s property caused by tenants “growing marijuana in their rental units,” the court’s conclusion was premised on the fact that the tenants’ acts were illegal under both federal and state law. In other words, the tenants were not authorized by the state (in this case, Michigan) to grow marijuana.

At the same time, though, the Sixth Circuit also indicated that its holding might have been different had the tenants been acting in compliance with state law. “Under different circumstances,” the federal appellate court stated, the policyholder/landlord “might have a strong federalism argument in favor of coverage.” Although the court’s discussion in this regard may be considered dicta, it is still noteworthy. Analytically sound, it suggests that an insurance policy’s “Dishonest or Criminal Acts Exclusion” may not preclude insurance coverage for losses experienced by cannabis-related businesses acting in compliance with applicable state law. For the cannabis industry, this analysis is the most important takeaway from the Sixth Circuit’s recent decision.

Authors: Michael H. Sampson

At issue in K.V.G. was a landlord’s claim for insurance coverage for damage caused to its rental property by its tenants. As the Sixth Circuit explained, “a commercial landlord leased several pieces of real property to a group of commercial tenants. [The landlord] authorized the tenants to use the property for general office or light industrial business.” Unbeknown to the landlord, however, the tenants used the property to grow marijuana. The tenants’ operations caused extensive damage to the units. “To accommodate their ‘business,’” the Sixth Circuit explained, “the tenants removed walls, cut holes in the roof, altered ductwork, and severely damaged the HVAC systems.”