INSURANCE CASE LAW INVOLVING CLAIMS FOR MARIJUANA

PLRB Property Insurance Law Review
Edition Date: April 11, 2012 PLRB Case No.: 8428
Plaintiff: Tracy Defendant: USAA Casualty Insurance Co.
State: HI, Hawaii, Hawai'i Key(s): HO43 HO57 HO91
Citation: Civil No. 11–00487 LEK–KSC, 2012 WL 928186 (D. Hawaii 3/16/12) Author: Kathryn K. Jensen, Counsel and Senior Editor
Subject: ~ theft of marijuana plants; state law permitting medical use of, possession, cultivation of marijuana; conflict with federal criminal law, Controlled Substances Act; insurable interest; lawful interest under state law; economic interest; theft peril; trees, shrubs and plants additional coverage; recovery barred as contrary to federal law and public policy

Tracy v. USAA Casualty Insurance Co.

Civil No. 11-00487 LEK-KSC., 2012 WL 928186 (D. Hawaii 3/16/12)

(click here for text of opinion)

In Brief

Medical marijuana plants were not covered by a homeowners policy. The policyholder had a lawful insurable interest in the property under Hawaii's medical marijuana laws. Nevertheless, to allow coverage for the plants would be contrary to federal public policy because possession and use of marijuana, even for medical purposes, is strictly prohibited by federal criminal drug laws. Therefore, even if the policy could be otherwise construed as affording coverage for theft of the plants, any contractual right to recovery for the loss would be unenforceable.

Facts

The policyholder filed a homeowners claim for theft of twelve marijuana plants, nine of which were mature plants. She claimed she lawfully possessed and cultivated the plants pursuant to Hawai'i state law authorizing personal medical use of marijuana.

The insurer initially agreed to pay the claim and sent the policyholder a check for $8,801. The policyholder disputed the amount and sought additional payment. She claimed that the policy entitled her to recover the actual cash value of the plants, which she assessed at $4,000 for each mature plant and $3,200 each for the less mature plants, for a total of $46,600. The insurer notified her that it would make no further payments. The policyholder filed suit, claiming she should recover the fair and reasonable value of the plants. She also claimed bad faith and sought punitive damages and attorney's fees.

Arguments for and against coverage

The insurer moved to dismiss, arguing that there was no coverage for the loss because the policyholder lacked insurable interest in the property. The insurer contended that an insurable interest must be a lawful one. Since possession, use, and distribution of marijuana violates federal criminal law, allowing coverage for loss of an illegal controlled substance would be contrary to federal public policy. Coverage would presuppose that the policyholder would purchase, sell, and/or distribute marijuana plants with insurance proceeds. In addition, Haw. Rev. Stat. § 328-124 states that the medical marijuana laws should not be construed as requiring "insurance coverage for the medical use of marijuana."

The policyholder contended that her possession and cultivation of marijuana was expressly authorized by Hawai'i statutes and that the statute governing return of seized medical marijuana supported her claim of lawful insurable interest. She also argued that the language of the policy, which covered plants and excepted medical marijuana from its exclusion from liability coverage for losses involving controlled substances, indicated that the insurer contemplated coverage for medical marijuana plants. Finally, she argued that coverage was within the objectively reasonable expectations of a policyholder, and therefore the policy should be construed in her favor, as the insurer itself did when it first paid her claim.

Court's inquiry as to the lawfulness of the number of plants possessed

At the hearing on the insurer's motion to dismiss, the court raised the issue of whether the twelve plants that were the subject of the insurance claim exceeded an "adequate supply" of marijuana under Hawai'i statutes and regulations for medical use of marijuana. In response, the policyholder submitted copies of three medical certificates from the State Medical Marijuana Registry as evidence that she and another resident of her household each had licenses to grow plants for medical purposes and that a friend also had a license as the designated caretaker for one of them.

The policyholder argued, on the basis of these certificates, that the nine mature plants were lawfully present at her house and that the three immature plants were for her friend's supply. She cited the policy's coverage for personal property owned by others when it is at the insured premises. The insurer countered that the policyholder made binding admissions in her complaint that she possessed all twelve of the plants. In addition, the insurer objected that the policyholder's statements were inadmissible because she had no personal knowledge of the possession of marijuana by persons who were not parties to the lawsuit. Finally, the insurer argued that even if her statements were admissible, the facts she alleged revealed she had not complied with the requirements of Hawai'i law for possession and medical use of marijuana.

Policy Language

The policy contained the following property coverage for plants:

Trees, Shrubs and Other Plants. We cover trees, shrubs, plants or lawns, on the residence premises, for loss caused by the following Perils Insured Against: … Vandalism or malicious mischief or Theft.

We will pay up to 5% of the limit of liability that applies to the dwelling for all trees, shrubs, plants or lawns. No more than $500 of this limit will be available for any one tree, shrub or plant. We do not cover property grown for business purposes.

This coverage is additional insurance.

Id. at *6.

The liability coverage section of policy provided:

Coverage E-Personal Liability and Coverage F-Medical Payments to Others do not apply to bodily injury or property damage:

…

j. arising out of the use, sale, manufacture, delivery, transfer or possession by any person of a controlled substance(s). Controlled substances include but are not limited to cocaine, LSD, marijuana and all narcotic drugs. However, this exclusion does not apply to the legitimate use of prescription drugs by a person following the orders of a licensed physician.

Id. at *7.

Statutes and Regulations

Insurable interest is required by statute as follows:

ARTICLE 10E

PROPERTY INSURANCE

§431:10E-101 Insurable interest in property required. No contract of insurance on property or of any interest therein or arising therefrom shall be enforceable except for the benefit of persons having an insurable interest in the property insured. Insurable interest means any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage. [L 1987, c 347, pt of §2]

Haw. Rev. Stats.

Hawai'i law also prohibits the enforcement of illegal contracts:

§1-5 Contracts in contravention of law. Private agreements shall have no effect to contravene any law which concerns public order or good morals. But individuals may, in all cases in which it is not expressly or impliedly prohibited, renounce what the law has established in their favor, when such renunciation does not affect the rights of others, and is not contrary to the public good. [CC 1859, §7; RL 1925, §7; RL 1935, §7; RL 1945, §6; RL 1955, §1-8; HRS §1-5]

Haw. Rev. Stats.

Haw.Rev.Stat. § 328-127 provides for return of marijuana plants after government seizure:

[§329-127] Protection of marijuana and other seized property. Marijuana, paraphernalia, or other property seized from a qualifying patient or primary caregiver in connection with a claimed medical use of marijuana under this part shall be returned immediately upon the determination by a court that the qualifying patient or primary caregiver is entitled to the protections of this part, as evidenced by a decision not to prosecute, dismissal of charges, or an acquittal; provided that law enforcement agencies seizing live plants as evidence shall not be responsible for the care and maintenance of such plants. [L 2000, c 228, pt of §2]

Haw.Rev. Stats.

Haw.Rev.Stat. § 328-124 states that insurance coverage is not required for use of medical marijuana:

[§329-124] Insurance not applicable. This part shall not be construed to require insurance coverage for the medical use of marijuana. [L 2000, c 228, pt of §2]

Haw.Rev.Stats.

The court described and quoted relevant sections of Hawai'i medical marijuana statutes, including the following:

Haw.Rev.Stat. § 329-125(a) states: "A qualifying patient or the primary caregiver may assert the medical use of marijuana as an affirmative defense to any prosecution involving marijuana under this [part] or chapter 712; provided that the qualifying patient or the primary caregiver strictly complied with the requirements of this part." (Alteration in original) (emphasis added).

Some of the requirements that a qualifying patient must comply with are set forth in Haw.Rev.Stat. § 329-122(a), which states:

Notwithstanding any law to the contrary, the medical use of marijuana by a qualifying patient shall be permitted only if:

(1) The qualifying patient has been diagnosed by a physician as having a debilitating medical condition;

(2) The qualifying patient's physician has certified in writing that, in the physician's professional opinion, the potential benefits of the medical use of marijuana would likely outweigh the health risks for the particular qualifying patient; and

(3) The amount of marijuana does not exceed an adequate supply.

(Emphasis added.)

Haw.Rev.Stat. § 329-121 states:

"Adequate supply" means an amount of marijuana jointly possessed between the qualifying patient and the primary caregiver that is not more than is reasonably necessary to assure the uninterrupted availability of marijuana for the purpose of alleviating the symptoms or effects of a qualifying patient's debilitating medical condition; provided that an "adequate supply" shall not exceed three mature marijuana plants, four immature marijuana plants, and one ounce of usable marijuana per each mature plant.

Id. at *7.

Haw. Admin. R. § 23-202-13 states, in pertinent part:

(a) A qualifying patient who possesses a registry identification certificate issued pursuant to section 329-123, Hawai'i Revised Statutes, may engage in and a registered primary caregiver of the patient may assist in, the medical use of marijuana only as justified to mitigate the symptoms or effects of the qualifying patient's debilitating medical condition.

(b) The medical marijuana shall be grown only at the following locations:

(1) The qualifying patient's home address; or

(2) The primary caregiver's home address or other location owned or controlled by the qualifying patient or the primary caregiver that is approved by the administrator and designated on the registry certificate issued by the department.

Id. at n.2.

Trial Court Holding

Granted summary judgment for the insurer on the basis that the coverage for the loss would contravene federal law and public policy.

Trial Court Rationale

I. GENUINE ISSUES OF MATERIAL FACT PRECLUDED RULING ON WHETHER THE POLICYHOLDER'S POSSESSION OF THE PLANTS WAS IN ACCORD WITH HAWAI'I LAW

The court was unable to resolve the issue of whether the policyholder's possession of the twelve plants was in accord with the requirements of Hawaii's medical marijuana statutes and regulations. The policyholder's statements, which the court deemed admissible, raised genuine issues of fact regarding whose plants the policyholder possessed and whether her possession of all the plants was in accord with Hawai'i law. Consequently, the court could not rule as a matter of law that the policyholder's claim should be dismissed on the basis that it was unlawful under Hawai'i law, as well as federal drug laws.

II. THE POLICYHOLDER HAD A LAWFUL INSURABLE INTEREST IN THE PLANTS

Insurable interest is defined as "any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage." §431:10E-101, Haw. Rev. Stats. The insurer does not dispute that the policyholder had a substantial economic interest in the plants but rather whether her interest was lawful.

The Hawai'i Supreme Court has not construed the medical marijuana laws, but the appellate court has referred to them as creating "an entitlement to the medical use of marijuana." Id. at *9, quoting State v. Blagus, No. 30016, 2010 WL 3759788, at *2 (Hawai'i Ct.App. 9/27/10). 2010). The appellate court's analysis of the statutes indicates that "if a qualifying patient meets the requirements of § 329-122(a), and all other applicable provisions of Chapter 329, Part IX,FN4 the patient is permitted to use marijuana for medical purposes." Id.

The Hawai'i legislature, in enacting Chapter 329, Part IX, also articulated its intent to legalize use of marijuana for medical purposes, notwithstanding the prohibitions under federal criminal law:

The legislature finds that modern medical research has discovered a beneficial use for marijuana in treating or alleviating the pain or other symptoms associated with certain debilitating illnesses. There is sufficient medical and anecdotal evidence to support the proposition that these diseases and conditions may respond favorably to a medically controlled use of marijuana.

The legislature is aware of the legal problems associated with the legal acquisition of marijuana for medical use. However, the legislature believes that medical scientific evidence on the medicinal benefits of marijuana should be recognized. Although federal law expressly prohibits the use of marijuana, the legislature recognizes that a number of states are taking the initiative in legalizing the use of marijuana for medical purposes. Voter initiatives permitting the medical use of marijuana have passed in California, Arizona, Oregon, Washington, Alaska, Maine, Nevada, and the District of Columbia.

The legislature intends to join in this initiative for the health and welfare of its citizens. However, the legislature does not intend to legalize marijuana for other than medical purposes. The passage of this Act and the policy underlying it does not in any way diminish the legislature's strong public policy and laws against illegal drug use.

Therefore, the purpose of this Act is to ensure that seriously ill people are not penalized by the State for the use of marijuana for strictly medical purposes when the patient's treating physician provides a professional opinion that the benefits of medical use of marijuana would likely outweigh the health risks for the qualifying patient.

Id. at *9-10, quoting 2000 Haw. Sess. Laws Act 228, § 1 at 595-96.

The statute cited by the insurer as precluding insurance coverage for use of medical marijuana, Haw.Rev.Stat. § 328-124, may be reasonably construed as applying to all kinds of insurance, rather than just health insurance. But even assuming this is a correct reading, the statute does not support the insurer's argument that its policy may not be interpreted as providing coverage. The statute only says that the state of Hawai'i does not require coverage … it does not prohibit insurers from providing it.

The court concluded that the policyholder had a lawful insurable interest in the plant, reasoning as follows:

[T]he Court predicts that the Hawai'i Supreme Court would hold that a qualifying patient who is in strict compliance with the Hawai'i medical marijuana laws has a lawful interest in her marijuana supply for purposes of Haw.Rev.Stat. § 431:10E101. This Court therefore CONCLUDES that Plaintiff had a insurable interest in her marijuana plants which were the subject of her insurance claim.

Id. at *10.

III. COVERAGE FOR THE PLANTS WOULD BE CONTRARY TO FEDERAL LAW AND PUBLIC POLICY

Enforcement of the insurance contract, to the extent it may provide coverage for the plants, is not permitted because it would violate federal law and public policy. Under Hawai'i law, a court may refuse to enforce a contract that is illegal or in violation of public policy. Inlandboatmen's Union of the Pacific v. Sause Bros., 77 Hawai'i 187,194, 881 P.2d 1255, 1262 (Haw. App. 1994).

The U.S. Supreme Court decided in Gonzales v. Raich, 545 U.S. 1, 125 S.Ct. 2195, 162 L.Ed.2d 1 (U.S. 2005) [reviewed at PLRB, Prop. Ins. L. Rev. 6985 (2005)] (U.S. 2005), that intrastate, non-commercial cultivation, possession, and use of marijuana was still subject to criminal prosecution under the federal Controlled Substances Act, not withstanding California medical marijuana laws. Other federal courts have repeatedly recognized that Gonzales "establishes that possession and use of marijuana for medical use is illegal under federal law, even when it is permitted under state law." Id. at 12. See e.g. United States v. Stacy, No. 09cr3695, BTM, 2010 WL 4117276 at *5 (S.D.Cal. 10/18/10) ("California law does not purport to render the use of medical marijuana lawful under federal law. In fact, the use of medical marijuana remains unlawful under federal law."); and United States v. Hicks, 722 F.Supp.2d 829, 833 (E.D.Mich. 2010) ("It is indisputable that state medical-marijuana laws do not, and cannot, supercede federal laws that criminalize the possession of marijuana.").

Assuming for the purposes of the insurer's motion that the provision for coverage for "Trees, Shrubs, and Other Plants" would apply to the policyholder's loss of medical marijuana plants, the provision was unenforceable. The court explained:

[T]his Court cannot enforce the provision because [the policyholder's] possession and cultivation of marijuana, even for State-authorized medical use, clearly violates federal law. To require [the insurer] to pay insurance proceeds for the replacement of medical marijuana plants would be contrary to federal law and public policy, as reflected in the CSA [Controlled Substances Act],Gonzales, and its progeny. The Court therefore CONCLUDES that, as a matter of law, [the insurer's] refusal to pay for [the policyholder's] claim for the loss of her medical marijuana plants did not constitute a breach the parties' insurance contract.

Id. at *13.

Comments

This case was decided by a federal district court, a trial court in the federal judicial system. As such, it may be cited as persuasive authority but not as binding precedent for other courts.

Nevertheless, the decision is significant because it is the first we have seen that has squarely decided that there is no first-party property coverage for loss of medical marijuana under homeowners' policies. It is unusual for a court to refuse to enforce an insurance coverage provision on the grounds that it violates public policy because, all things being equal, most courts would prefer to ground their decisions on the language of the insurance contract, statutes, case law, or some other legal authority than "public policy." In this case, however, it can be argued that this is the kind of extraordinary situation that calls for application of the public policy doctrine because of the inherent conflicts and tensions between state and federal law with respect to medical marijuana.

While some states clearly allow possession and medical use of marijuana under certain circumstances, on the other hand, the U.S. Supreme Court has clearly held that such conduct is subject to criminal prosecution under the federal Controlled Substances Act. Unless or until Congress changes the federal law, anyone who possesses or uses marijuana for medical purposes under state law can only avoid criminal prosecution under federal law if and when federal drug enforcement official decline to prosecute the law against individuals. Federal officials have not, however, always declined to do so. Consequently, it puts homeowners insurers in an awkward legal position if they want to deny coverage for these kinds of claims but have not adopted policy language that would expressly allow them to do so.

For further discussion of these issues, see Barnett v. State Farm General Insurance Co., No. G043748, 2011 WL 5121064, --- Cal.Rptr.3d --- (Cal. App. 4 Dist. 10/31/11) [reviewed at PLRB, Prop. Ins. L. Rev. 8341 (2011)] (theft peril under a homeowners policy did not include police seizure and destruction of medical marijuana) and PLRB, TYCK - Is "Medical Marijuana" Covered under a Homeowners Policy? (2009).

For discussion of the conflict between state and federal law and preemption by federal law with regard to medical marijuana, see PLRB's Comments section of its review of City of Garden Grove v. Superior Court, 68 Cal.Rptr.3d 656 (Cal. App. 11/28/07) No. G036250, review denied (Cal. 3/19/08), cert den., No. 07-1569, 129 S.Ct. 623 (U.S. 12/01/08) [reviewed at PLRB, Prop. Ins. L. Rev. 7703 (2009)] (the federal Controlled Substances Act did not preclude the court finding that the police were required to return the defendant's marijuana after criminal drug charges were dropped); and State v. Nelson, 2008 MT 359, 195 P.3d 826 (Mont. 10/28/08) [reviewed at PLRB, Prop. Ins. L. Rev. 7704 (2009)] (trial court abused its discretion in making compliance with federal drug laws a condition for a suspended sentence for a defendant who qualified for use of medical marijuana under state law). See also, Pack v. Superior Court, 199 Cal.App.4th 1070, --- Cal.Rptr.3d ----, 2011 WL 4553155 (Cal.App. 2 Dist. 10/04/11) (city ordinance that allocated permits and otherwise regulated cultivation and distribution of medical marijuana conflicted with federal drug laws; City of Garden Grove questioned at n.27).

For a general discussion of the scope of the "theft" peril under homeowners forms and coverage for trees, shrubs, and plants, see PLRB, Homeowners Annot. HO57 - Theft and PLRB, Homeowners Annots., HO43 - Trees, Shrubs, and Other Plants. For additional case law on insurable interest, see PLRB, Homeowners Annots., HO91 - Insurable Interest.