Last week, the Sixth Circuit Court of Appeals affirmed a ruling denying insurance coverage to a homeowner for damages resulting from a fire when a medical-marijuana operation inside the home caught fire. The case, Nationwide Mut. Fire Ins. Co. v. McDermott (Feb. 24, 2015), revolved around whether coverage for property damage under a homeowner’s policy was properly denied because of the owner’s failure to inform the insurer of her husband’s operation of a medical-marijuana grow and distribution facility inside her home. The Court answered that question in the affirmative, finding that the policy required the homeowner “to notify [Nationwide] as soon as possible of any change which may affect the premium risk under th[e] policy,” including, but not limited to, “changes … in the occupancy or use of the residence premises.” (emphasis in the original).
According to the homeowner, the policy language was never intended to require her to inform her insurance company of every possible change in the use or occupancy of her home. The insured argued that, under the insurer’s interpretation, homeowners would be required to notify the insurer anytime they invited guests over to stay at the home, or introduced a new house plant. The Sixth Circuit didn’t buy this hypothetical:
Though the [homeowner] correctly asserts that her policy “d[id] not envision [that] ever ‘change’ be reported to the insurance company,” the policy did require that [the homeowner] report changes in the use of the residence that would affect the premium risk. To equate setting up a marijuana growing operation-an operation not likely contemplated by insurance companies at the time of drafting a standard fire insurance policy-to buying a houseplant or entertaining guests-both activities an insurance company would reasonably expect a homeowner to do-mischaracterizes the extent of the change in use at issue.”
Interestingly, the Sixth Circuit went on to note that an underwriter testified that, had the insurer been informed of the marijuana operation, it would have declined coverage altogether because such an operation “is an increased hazard and ‘an unacceptable risk.’”
The Sixth Circuit’s opinion in Nationwide is particularly enlightening for insureds in Oregon as they await the implementation of Measure 91, which legalizes the recreational use of marijuana in Oregon. As dispensaries start popping up all over Oregon in anticipation of Measure 91 taking effect, commercial property owners renting space to marijuana growers and distributors should review their insurance policies carefully to make sure they are fully covered in the event of a loss. For example, although Oregon, Washington, and Colorado have all adopted measures allowing for recreational marijuana sales and use, the sale and distribution of marijuana is still a crime under federal law. A common exclusion in property policies excludes liability for loss or damage caused by or arising out of any criminal act or violation of state and/or federal law. A prudent insured who plans to rent or own space with the intended purposes of growing, distributing, and/or selling marijuana, in addition to reviewing all the regulations and licensing requirements for such operations, should make sure that their policies do not exclude coverage for losses arising out of their operations and that their insurance companies are fully informed of the intended use and occupancy of the premises involved
Nationwide Mut. Fire Ins. Co. v. McDermott (Feb. 24, 2015) opinion reprinted from WestlawNext with permission of Thomson Reuters. If you wish to check the currency of this case by using KeyCite on WestlawNext, please visit www.next.westlaw.com.