In the case Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company, a cannabis company sued its insurance carrier for failing to pay on claims, unreasonable delay, and bad faith. Colorado Federal District Court Chief Judge Marcia S. Krieger recently ruled that Green Earth’s stock or inventory (i.e. saleable marijuana inventory) are insurable under a general liability insurance policy but that growing crops are excluded under the policy.
Green Earth operates a medical marijuana dispensary and commercial grow facility near Colorado Springs. Green Earth made two claims to its carrier, Atain. For its first claim, Green Earth claimed that “smoke and ash from [a nearby wild fire] overwhelmed [Green Earth’s] ventilation system, eventually intruding into the growing operation and causing damage to Green Earth’s marijuana plants.” For its second claim, Green Earth claimed that burglars broke into Green Earth’s facility causing damage to the roof and stealing marijuana plants. Atain denied both claims.
Atain argued that the policy excluded coverage for “[c]ontraband, or property in the course of illegal transportation or trade.” Atain further argued that “public policy requires that coverage be denied, even if the [insurance] Policy would otherwise provide it.” Two issues were before the Court on Atain’s summary judgment motion:
- Whether federal law and federal public policy make it illegal for Atain to pay for damage to marijuana plants and products, (including whether the Court can order Atain to pay for these damages); and
- Whether the Policy’s Contraband Exclusion removes Green Earth’s marijuana plants and material from coverage.
Significantly, Judge Krieger determined that Colorado law applied as the insurance contract mandated that disputes “will be governed by the law of the state in which the suit is brought.” Applying Colorado state law meant the Court could disregard Atain’s “illegality under federal law” argument. Judge Krieger further held that (1) Atain’s policy failed to define “contraband”, (2) that Atain failed to prove Green Earth violated Colorado’s marijuana laws, and (3) noted mixed messages regarding enforcement at the federal level. Consequently, the Court found that Atain’s “contraband” exclusion was ambiguous. The Court then looked to the parties’ intention regarding coverage for finished inventory and harvested plants (as opposed to crops) and found nothing in the factual record showing that Atain sought to specifically exclude such coverage. In fact, the Court found that Atain knew Green Earth was a cannabis business and still issued its insurance policy despite federal laws, without making any unequivocal exemption, even under the “contraband” provision, for finished inventory or harvested plants. Finally, Atain sought to invoke the federal Controlled Substances Act to argue that its own insurance policy was an illegal contract. The Court’s responded “Atain, 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.”