Liability insurance may exclude coverage for losses arising out of the use, sale, manufacture, delivery, transfer, or possession of marijuana or marijuana-related products. The manner in which policies exclude such coverage varies based on the language of specific exclusions. Such exclusions may hinge on the illegality of marijuana. The changing legal status of marijuana under federal law and different state laws has resulted in coverage issues for insurers and insureds, including businesses that service the industry.
The federal government appears to be taking steps to loosen restrictions on marijuana and may be moving toward closer alignment with the laws of numerous states that have already done so. To that end, in January, the United States Department of Health and Human Services made public its recommendation that marijuana be reclassified from Schedule I (the most restrictive scheduling) to Schedule III of the Controlled Substances Act, citing, among factors, the “currently accepted medical use” of the drug.
On May 21, the U.S. Drug Enforcement Administration (DEA) published a proposed rule in the U.S. Federal Register to reschedule marijuana to a Schedule III drug, initiating the formal rulemaking process. We note that, until a final rule is published, marijuana remains a Schedule I controlled substance.
Potential Changes in Federal Marijuana Classifications
A growing movement in Washington to reclassify cannabis under the Controlled Substances Act (CSA) could impact coverage for marijuana-related losses under some insurance policies. The DEA’s move, which represents a dramatic shift to decades of U.S. drug policy, comes on the heels of a recommendation from the federal Health and Human Services Department (HHS) to reschedule the drug. The proposal, which is subject to public comment until July 22, is a critical next step towards marijuana policy reform on the federal level.
To give greater context, Schedule I substances like marijuana have no currently accepted medical use. Other Schedule I drugs include heroine, LSD, and ecstasy. That would change if marijuana is reclassified. Schedule III drugs are generally defined as having accepted medical uses and a lower potential for abuse than drugs or other substances in Schedules I and II. Schedule III substances can be lawfully dispensed by prescription.
However, according to the Congressional Research Service, “prescription drugs must be approved by the Food and Drug Administration (FDA)” and although the “FDA has approved some drugs derived from or related to cannabis, marijuana itself is not an FDA-approved drug.”
The HHS recommended to the DEA that marijuana be rescheduled based on the FDA’s review of marijuana and related findings. According to a letter from HHS to DEA, among factors considered, it was noted “the risks to the public health posed by marijuana are lower compared to other drugs of abuse (e.g., heroin, oxycodone, cocaine), based on an evaluation of various epidemiological databases for emergency department (ED) visits, hospitalizations, unintentional exposures, and most importantly, for overdose deaths.”
The letter and recommendation came almost a year after Pre. Joe Biden called on the Secretary of Health and Human Services and the Attorney General to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.
To be sure, the legal status of marijuana has been a hot-button issue for decades with about three-quarters of states having already legalized the drug for medical or recreational purposes.
Coverage Implications
The ever-evolving nature of marijuana law and disparity between state and federal law has created coverage issues for insurers and insureds, including those operating businesses in states in which marijuana and products derived therefrom are legal under state law but illegal under federal law. The reclassification of marijuana may streamline this issue, in particular when related to medical marijuana.
For example, some homeowners’ policies contain a “Controlled Substance” exclusion, which is reliant on the federal definitions of “controlled substances.” [See, Mass. Prop. Ins. Underwriting Ass'n v. Gallagher, 75 Mass.App.Ct. 58 (2009)]. In Gallagher, the policy’s “Controlled Substance” exclusion, excluded coverage for loss “[a]rising out of the use, sale, manufacture, delivery, transfer or possession by any person of a Controlled Substance as defined by the Federal Food and Drug Law…. However, this exclusion does not apply to the legitimate use of prescription drugs by a person following the orders of a licensed physician."
The application of an exclusion, like the one cited in Gallagher, based on the federal definition of “controlled substance,” could be impacted by a change in the federal classification of marijuana. We note that the cited exclusion has a prescription carve-back, which appears to anticipate Schedule III drugs.
Moreover, policies may contain a “Contraband” exclusion, which excludes coverage for property in illegal transit or trade. [See, Green Earth Wellness Center, LLC v. Atain Specialty Insurance Co., No. 13-cv-03452-MSK-NYW (D. Colo. Feb. 17, 2016)]. In Green Earth, a Colorado district court ruled that a commercial property and general liability insurance policy covered certain losses related to damage to the plants and operations of a retail medical marijuana grower despite the presence of a “Contraband” exclusion. Although the operation was still federally illegal, the court applied Colorado state law citing the medical marijuana business as legal as a matter of state law and the losses not related to illegal contraband excluded by the policy. To the extent the reclassification more closely aligns federal law with state law, controversies over “illegal transit or trade” will become more clear.
Key Considerations
As the law continues to change on marijuana and products derived from marijuana and cannabis, any policy exclusion which is based upon the legal status of marijuana or cannabis under either federal or state law must be carefully crafted and/or reviewed to ensure that the coverage being provided matches the expectations of the insurer and the insured. The change in federal classification should allow insurers and policy holders to better anticipate and write coverage for intended risks.
Of course, this requires an understanding of the language contained within the policy, as well as the legal landscape of the jurisdiction in which the policy is issued or the business operations of the insured are performed. All parties which insure or operate within the marijuana/cannabis industry should work with counsel to remain informed on the rapidly evolving legal status for cannabis and marijuana as it may impact coverage.