IDENTIFYING THE CAUSE OF LOSS
IDENTIFYING THE CAUSE OF LOSS
Bethany Bowers had a mess on her hand when she discovered that her tenants were marijuana farmers. Unfortunately for Bethany, the tenants grew the product in the basement of her house using grow lights and heat diverted from the furnace. The activity created moisture throughout the house which resulted in warped paneling and mold. When Bethany discovered the situation, she made a claim to her carrier who denied all mold-related damage. She sued arguing that because the mold was the direct result of vandalism, coverage should apply.
Read here to whether the appellate court agreed with the trial court or with the plaintiff?
Bethany Bowers (Bowers) filed a lawsuit against Farmers Insurance Exchange (Farmers) after most of her claim was denied. Bowers’ rental dwelling was insured under a Farmers Landlord’s Insurance Policy. During the policy term, Bowers had rented her home to tenants who, unknown to her, used the dwelling to grow marijuana, causing damage throughout. Farmer’s replaced warped paneling but denied other damage. A lower court decided against Bowers, ruling that the policy had no obligation to respond and she appealed.
Upon appeal, the higher court reviewed the issue. Bowers’ tenants made significant changes to her property. The basement was used to grow marijuana, assisted by installing halide (heat-generating) lights, walls were covered throughout the home and the flow of the residence’s furnace was diverted to the basement. While optimizing the ability to grow plants, the changes also created heavy moisture and condensation. Besides warped paneling, mold grew and covered most surfaces. The mold damage was deemed to be excluded and a lower court agreed with Farmer’s position that the policy’s exclusion regarding mold applied and that the policy’s vandalism coverage was inapplicable.
The higher court read the vandalism issue differently. It considered that the renters acted in a manner that demonstrated disregard for the inevitable damage they caused by the installation and use of the special lights, diverting the residence’s heat and sealing the home. The court based its decision on interpreting vandalism and malicious mischief as including willful and wanton acts. In its view, the renters’ alterations were deliberate and foreseeably created harm, so their acts rose to a level that constituted V&MM.
The lower court decision was reversed in favor of Bowers. The case was remanded to rule on damages consistent with the higher court’s finding. Bowers was also awarded attorney’s fees.
Bethany Bowers, a single woman, Appellant, v. Farmers Insurance Exchange, a foreign insurance corporation, Respondent. Court of Appeals of Washington, Division 3. No.18306-8-III. Filed January 25, 2000/Amended March 7, 2000. Reversed and Remanded. Westlaw 991 P. 2d 734.
Insuring the marijuana industry
The sale of marijuana for medical purposes is legal in 20 states and for recreational and medicinal use in seven states. However, it remains subject to federal prosecution in all states. This conflicting position has resulted in most industry leaders refusing to write marijuana industry businesses. Recently the American Association of Insurance Services (AAIS) developed a Businessowners Policy that could be used by carriers in the state of California. This could be the beginning of standardized language and coverage for the industry.
See below to read the PF&M overview of the policy.
(December 2018)
INTRODUCTION
Dave Jones, the California Insurance Commissioner, put out a call to the insurance industry to develop a commercial product that could be used by cannabis operations in the state of California. American Association of Insurance Services (AAIS) responded to the call with this product that was introduced and approved by the state in 2018. It is restricted to only California and to certain type of operations, but it is a starting point for a more standardized type of coverage. AAIS has developed several definitions, conditions, and exclusions that could provide a coverage baseline. Unfortunately, the one thing the form cannot do is resolve the problem of a product being legal in a state and not being legal at the federal level. This leaves all parties to the insurance contract in a limbo regarding whether the contract is truly enforceable because contracts related to illegal products are generally not considered enforceable.
ELIGIBILITY
The following is a summary of eligibility criteria for the Cannabis Businessowners Policy – California:
- Commercial cannabis businesses that have up to 15,000 square feet of total floor area and up to $5,000,000 in annual sales per location
- Limited types of manufacturing and processing of cannabis
- Cannabis-related service businesses
Individual insurance companies may file their own deviations related to classes and eligibility.
Related Article: Cannabis Businessowners Policy – California Eligibility
POLICY MAKE UP
The Cannabis Businessowners Policy – California consists of three basic forms:
- CB 0001–Businessowners Declarations
Related Article: CB 0001–Cannabis Businessowners Policy Declarations
- CB 0204–Cannabis Businessowners Policy – California
Related Article: CB 0204–Cannabis Businessowners Policy – California Analysis
- Policy Cover Page or Jacket. Individual insurance companies design this form for their own purposes. It may include a table of contents or index to meet the requirements of some states.
COVERAGE FORMAT
The Cannabis Coverage Form is made up of three major sections.
Common Policy Conditions and Definitions
Property Coverages
- Additional Property Definitions
- Building
- Business Personal Property
- Loss of Income
- Perils Insured Against
- Excluded Perils
- Additional Property Exclusions
- Property Conditions
Liability Coverages
- Additional Liability Definitions
- Commercial Liability Coverages
- Coverage L–Bodily Injury Liability and Property Damage Liability
- Coverage M–Medical Payments
- Coverage O–Fire Legal Liability
- Coverage P–Personal and Advertising Injury Liability
- Additional Liability Exclusions
- Supplemental Payments
- Liability Conditions
Related Article: CB 0204–Cannabis Businessowners Policy – California Analysis
ENDORSEMENTS
Endorsements tailor the Cannabis Businessowners Policy to customize the broad coverage provided to respond to specific situations. Some endorsements are specific to cannabis operations and start with the CB designation. Others are BP endorsements that are available for any type of business. Attaching the correct endorsement is like tailoring a suit–it ensures that the coverage fits the insured.
Related Article: Cannabis Businessowners Policy Available Endorsements And Their Uses
UNDERWRITING
Underwriting the Cannabis Businessowners Policy – California must start with an evaluation of standard property and liability exposures. When evaluating the specific cannabis-related operation there are several unusual exposures that require significant research and background to properly assess a specific risk’s exposures.
Related Article: Cannabis Businessowners Policy Underwriting Considerations
RATING
The Cannabis Businessowners Policy – California’s rating procedures are very exacting and require that several steps be performed in a specific sequence. It is important to understand exactly what is expected and the rating method that applies.
Related Article: Cannabis Businessowners Policy Rating Considerations
What are the questions?
The only way to find a market for a marijuana-related risk is to start asking questions and developing an application. Because of the interest in this industry, a newly developed narrative, questionnaire and supplement for Marijuana Dispensaries has been added to the Commercial Lines Survey. As with the AAIS coverage form, this is only a starting place. Additional exposures, hazards, and loss potentials will continue to be uncovered as losses occur and are aggregated.
Here is a review of the newly introduced marijuana narrative.
MARIJUANA DISPENSARY
Category: Retail Stores
SIC CODE: None
NAICS CODE: None
Note: SIC and NAICS codes are assigned by the US Government. Because this product remains illegal, no codes have been assigned.
Suggested ISO General Liability Code: None available
Suggested Workers Compensation Code: None available
Note: ISO and NCCI have not provided any codes specifically for marijuana dispensaries.
Description of operations: Marijuana is sold for medical use only in almost half of the states. The medical dispensaries are similar to drug stores. The patient must provide an identification card proving that they are eligible to receive the drug. Most stores provide a consultant who works with the patient to find the appropriate product for them. It may be a loose-leaf product but could be liquid, oil, powder, pill, rolled or a vapor. The product may be provided as an edible or it may be butter infused with marijuana that the patient can use when making his or her own edibles. Additional accessories may be available in the shop.
In states where recreational use is permitted the shops are similar to the medical marijuana dispensary, but customers are not required to provide marijuana identification cards. These stores are more similar to liquor or vape stores.
Some research indicates that marijuana is useful in pain relief for conditions such as chemotherapy-induced nausea, glaucoma, multiple sclerosis, and neuropathy, and as an appetite stimulant for such disorders as AIDS wasting syndrome. However, the FDA has not approved it for any type of medicinal or recreational use as no studies have been done in clinical trial settings. Conducting clinical research involves the FDA along with the DEA (Drug Enforcement Administration) and the NIDA (National Institute on Drug Abuse). Concerns have been expressed as to the lack of consistency in drug purity and potency, impact on fetuses by pregnant women, and long-term usage implications such as drug dependency.
Currently, over half of the states have approved the use of medicinal marijuana under specifically defined circumstances, while nine states have approved its recreational use in small quantities. Manufacturing and distribution guidelines vary by state, as well as the form in which the product may be sold. However, the federal government continues to criminalize the growth, cultivation, and use of marijuana regardless of the circumstances. It is unclear how the differences in state and federal law will ultimately be resolved.
Property exposures are those of a retail store with a very valuable product, similar to liquor or jewelry stores. The products are highly combustible and easily contaminated by smoke, temperature changes, and humidity. They are also targeted by thieves due to the high resale value in the black market. Vandalism can result from trespassers and protestors. Appropriate security controls must be taken including physical barriers to prevent entrance to the premises after hours and an alarm system that reports directly to a central station or the police department.
Crime exposures are chiefly from employee dishonesty and theft of money and securities due to the high resale value of marijuana products on the black market. Employees may act alone or in collusion with outsiders in stealing money, raw materials, or finished stock. Background checks should be conducted on all employees. There must be a separation of duties between persons handling deposits and disbursements and handling bank statements.
Inland marine exposures include goods in transit and valuable papers and records for customers’ and suppliers’ information as well as quality control testing results. Backup copies of all records should be made and stored off premises. Goods in transit may be damaged by fire, theft, collision and overturn, or contamination.
Premises liability exposure is like other retail stores except for the need for extra security due to the value of the product. Floor coverings should be in good condition, no frayed or worn spots on carpet and no cracks or holes in flooring. Steps and uneven floor surfaces should be prominently marked. Enough exits must be provided and be well marked, with backup lighting systems in case of power failure. Parking lots and sidewalks need to be in good repair with snow and ice removed, and generally level and free of exposure to slips and falls. If the business is open after dark, there should be adequate lighting and appropriate security for the area.
Products liability exposure will depend on the supplier and the type of services provided to the customer. If the dispensary is only providing a legal product, the exposure is limited. However, if the dispensary is providing lab services that certify potency and lack of pesticides and other harmful ingredients, the exposure increases significantly. The consultative role of the employees can also increase the dispensary’s product liability. The products exposure increases if the dispensary supplies its own product.
Automobile exposure is generally limited hired nonownership of the employees running errands. This could increase if the dispensary offers delivery service or if it picks up product from its suppliers. If the product is in the vehicle with the driver, adequate ventilation is important to prevent driving impairment.
Workers compensation exposure can be significant because of the value of the product and the amount of cash on hand. Appropriate security must be provided, and training provided employees in preventing injury. Appropriate ventilation of the dispensary is crucial because of the potential impairment of employees due to exposure to the product that may contribute to accidents and possible long-term health issues.
Minimum recommended coverage:
Business Personal Property, Business Income with Extra Expense, Employee Dishonesty, Money and Securities, Computers, Valuable Papers and Records, General Liability, Employee Benefits Liability, Umbrella Liability, Hired and Nonownership Auto Liability, Workers Compensation
Other coverages to consider:
Earthquake, Flood, Leasehold Interest, Real Property Legal Liability, Cyberliability, Employment-related Practices Liability, Business Auto Liability and Physical Damage, Stop Gap Liability
Are you staying up on marijuana issues?
The Rough Notes Magazine has published several articles related to marijuana and will continue to do so because of how it is impacting the marketplace. The issues are not just about how to cover the marijuana growers and sellers, but also how to work with employees who are legal users of marijuana.
Here is a 2018 article about marijuana in the workplace.
The Innovative Workplace
CLEARING THE HAZE ABOUT MARIJUANA IN THE WORKPLACE
Clear vision regarding accepted practices is hard to find
Legalized marijuana is a hot topic for 2018, making human resources and risk managers’ jobs more difficult. With expanding legislation legalizing medical and recreational marijuana spreading across the country, what used to be a clear workplace policy enforced by HR and safety managers—zero tolerance—is becoming hazier.
Support for legalization is reaching new highs, according to a Gallup poll reporting that 64% of Americans support legalization. Legal marijuana sales were predicted to reach $9.7 billion in North America last year, marking a 33% increase over 2016, according to cannabis industry analyst Arcview Market Research. Arcview’s analysts forecast that the legal cannabis market will grow 28% annually by 2021, as more states legalize marijuana for recreational use and today’s markets mature, as long as the federal government doesn’t crack down on state-legal cannabis.
Current situation
Today, nine states and the District of Columbia have legalized marijuana for recreational use: Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont, and Washington. Twenty-nine other states have legalized medical marijuana.
At the federal level, the Food and Drug Administration (FDA) maintains its position that marijuana is an illegal Schedule 1 drug. The Occupational Safety and Health Administration (OSHA) supports consistent testing and regulation of the drug in the workplace, and workers compensation underwriters take the same position. Businesses that have federal contracts must follow the Drug-Free Workplace Act and can lose eligibility for federal contracts unless they have strong zero-tolerance drug policies. Some states have similar rules for state contractors.
Businesses have a duty to protect employees and customers by providing a safe and healthy work environment. Historically, this responsibility meant that employers could develop and administer a zero-tolerance policy against substance abuse in the workplace with the right to test for the presence of those substances. For multi-state employers, there may be confusion today over how to apply the policy consistently across the organization with operations in states that have different laws about marijuana. Are they still able to use a consistent policy across the organization or does it need modification based upon the differing state laws?
What about testing for cannabis intoxication based on reasonable suspicion? Unlike alcohol, where the smell might trigger reasonable suspicion, this might not be the case for cannabis use. Depending upon how it is consumed, new technology delivering edible products loaded with THC, marijuana’s psychoactive component, and vape devices delivering concentrated THC, has eliminated the skunky smell once associated with the drug. Further, the marijuana industry suggests that drug testing is futile because the drug tests could yield positive results even if the employee hasn’t used the drug recently. The good news for employers is that there are new oral swab tests on the market that can detect actual impairment through saliva with a shorter detection window that contrasts with urine tests that don’t necessarily correspond to current impairment levels.
In addition to the questions about how employers manage the new reality of legalized marijuana in states where they operate, they also have a business to run. The talent war is still in full swing in many areas of the country, and attracting and retaining the best employees continues to be a priority. Competing for that top talent means projecting an employment brand that is employee-friendly, and some businesses might feel it necessary to soften their zero-tolerance policy to attract that talent.
Business options
For states without marijuana laws, employers can keep the current zero-tolerance policy and rely on the federal government’s strong stance that would support that approach. Federal contractors subject to the Drug-Free Workplace Act can continue to follow the requirements under the law to maintain eligibility for those contracts.
In states where medical marijuana is allowed, however, employers may have a duty to accommodate its usage, as with accommodations for other prescription drugs. The accommodations might include moving the employee to a less safety-sensitive position, changes in work hours, or other accommodations that would be considered reasonable and not cause undue hardship to the business. Employers should consult with legal counsel if these situations arise.
While the situation is still hazy, for employers in states with legalized recreational marijuana, most experts believe that it is allowable to continue enforcing policies restricting marijuana use on the job.
Key actions to take
Now would be a good time for HR and risk management to review the organization’s drug and alcohol policy. Seek legal counsel if operating in areas where marijuana is legal to ensure that any court interpretations are considered in drafting or refining the policy. Next steps should include the following:
- Define what is considered substance abuse and what types of substances are covered under the policy.
- Outline the process the company will take for determining reasonable suspicion for testing, the procedures for allowing the employee to remain at work or be sent home, and the penalties for infractions of the policy.
- Affirm that employees who disclose medical issues or request accommodations relating to a disability will be protected from discrimination and retaliation.
- If testing is part of the policy, review options for the oral swab technology that could yield better results for recent marijuana usage.
- Review the policy with safety, risk management and legal counsel.
- Communicate the policy to all employees.
- Train managers regarding the policy, procedures to follow and how to detect signs of impairment.
The author
Laura Kerekes is ThinkHR’s Chief Knowledge Officer and leads the ThinkHR content knowledge and human resources service delivery teams. She holds both the HRCI Senior Professional in Human Resources (SPHR) and SHRM-SCP professional designations.
About ThinkHR
ThinkHR partners with over 650 leading insurance brokers and payroll bureaus with an HR knowledge platform that enables their clients to obtain quick answers to urgent risk and liability questions, protecting clients from loss and legal action; stay informed on the correct responses and decisions for HR management and compliance matters; create web training programs to educate and develop employees in the areas of safety, management and wellness; and save time and money versus expensive alternate legal and HR resources.
