Oregon is taking significant strides to ensure that insuring cannabis risk is understandable and predictable for policyholders. In a move that could serve as an example for other states in which cannabis is legal in one form or another, the state has instructed all property and casualty insurance carriers to modify their policies to "explicitly state whether marijuana items and marijuana activities are covered or excluded," lest they subject themselves to bad faith claims.
On June 29, 2017, the Oregon Department of Consumer and Business Services' Division of Financial Regulation issued Bulletin DFR 2017-04. The Bulletin notes some of the issues familiar to those who have been following the intersection of insurance coverage and cannabis, including:
Exclusions for "illegal activity";
Exclusions for "contraband"; and
Exclusions for "coverage inconsistent with public policy.
The Bulletin expresses the Department's conclusion, following public comment (including resistance from the insurance lobby), that these types of exclusions "may be a source of confusion in some property and casualty insurance policies." Indeed, at least one insurance carrier has attempted to rely on the "contraband" exclusion in its property policy to avoid paying out on a significant claim, despite the carrier having knowingly issued a policy to a grow operation. Another carrier denied coverage for stolen marijuana plants under a medicinal cannabis user's homeowner's policy, which insured "trees, shrubs, and other plants." The carrier denied coverage under a narcotics exclusions, despite a carve out in that exclusion for "legitimate use of prescription drugs by a person following the orders of a licensed physician." But, what is "legitimate use" when medicinal marijuana use is legal under state law, yet continues to be illegal under federal law?
Thus far, courts have seemed to base their determinations regarding whether to enforce policy terms to cover cannabis risk on whether a carrier knowingly and intentionally took such risk on. The fully-disclosed grow operation gets coverage. The homeowner whose undisclosed cannabis plants get stolen does not.
Oregon is seeking to change this rubric. Through the Bulletin, the Department has informed carriers that going forward, they subject themselves to potential bad faith liability should they deny coverage based on exclusionary language rendered ambiguous due to the contradictions between state and federal law. It gave insurers 90 days from the Bulletin to start including explanatory notices to policyholders with newly issued policies and one year to incorporate clear language into the actual policies.
If the carriers comply with the Bulletin, all involved could benefit. Carriers would better understand their risk exposure, and Policyholders would better understand what coverage a particular carrier is willing to provide and know to shop around for insurance that covers their cannabis-related risk appropriately. If Oregon's action becomes a national trend, it could go a long way toward resolving one of the significant issues in insuring cannabis risk.