Insurance for Marijuana Suppliers
Marijuana suppliers often cannot obtain insurance coverage, which heightens their exposure to risks. As reported in The Cannabist, recent California wildfires highlight the risks these suppliers now must face on their own.
Jay Mootz (University of the Pacific – McGeorge School of Law), has an informative new article that discusses insurance for the marijuana industry: E/Insuring the Marijuana Industry, 49 University of the Pacific Law Review ___ (forthcoming 2017). (The article was part of a wonderful symposium organized by Mike Vitiello at McGeorge back in March 2017.) Jay’s paper makes two main contributions:
- It highlights the critical role that insurance plays in helping industries manage risks, and
- It surveys the burgeoning caselaw addressing insurance for the marijuana industry and identifies several reasons why the industry has struggled to obtain (or collect on) coverage for its losses.
On the latter point, Jay notes that some courts have refused to enforce insurance contracts with the marijuana industry because those contracts are against federal public policy. Insurance law is a species of contract law, and as discussed in the book (pages 645-55), one key tenet of contract law is that contracts against public policy are void. Jay aptly discusses the public policy considerations surrounding insurance contracts in particular, ultimately concluding that there is a case to be made both for and against enforcement.
There is one additional consideration, however, that Jay does not address in this paper: preemption (see pages 651-52, n.4 of the book). Even if a court were to find that contract doctrine favors enforcement – i.e., that the balance of policy considerations favors enforcement, it might still hold that enforcement of a contract is preempted by the federal marijuana ban. The important thing to recognize – as I’ve discussed in this article – is that preemption doctrine does not balance the equities. In other words, any state policy that favors enforcement of a contract is irrelevant for the preemption analysis because preemption is all about what Congress wants. So the only way to beat the preemption claim would be to demonstrate that Congress favors enforcement – e.g., that Congress would want to make sure that marijuana suppliers could recover for their losses. Needless to say, that’s a tough argument to make.
To illustrate, imagine that A, a marijuana grower, obtains a policy from B, an insurance firm, to cover any loss of crops. Now suppose that A’s 1,000 marijuana plants are destroyed in a fire and A seeks $1,000,000 under the policy to replace its crops. If B refuses to honor the contract and a court orders it to pay up, the court order would pose a straightforward conflict with federal law; indeed, it might even make it impossible for B to comply with federal law. After all, the insurance company would arguably be conspiring with A to produce — or at least aiding and abetting A’s production of – marijuana, in violation of federal law.
But I want to note one final wrinkle to this analysis. Congress has passed an unusual reverse preemption provision regarding insurance law: The McCarran Ferguson Act. 15 U.S.C. § 1012 provides that “No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.” Under this provision, one could argue that a state law mandating insurance coverage for marijuana suppliers is not preempted by the federal CSA (which does not “specifically relate[] to the business of insurance”). No state of which I am aware has yet passed such a law, though Colorado has come close – it has passed a provision, discussed on page 649, n.4, instructing that contracts in general are not void as against public policy so long as they pertain to marijuana activities that are legal under state law.