Cannabis Product Liability Policy Comparison Includes Coverage for RICO, MOLD, and Asbestos
Source Stephen Jones Twitter @CannabisBroker1
Cannabis Product Liability Policy Comparison Includes and Excludes Significant Coverage Issues
A tweet posted by a California insurance broker (Stephen Jones@CannabisBroker1) caught our attention due the level of detail being advertised from a Product Liability Policy Comparison. The graphic provides specific contrast of possible product liability coverage due to a specific cause from six different cannabis insurance companies.
The product liability policy comparison included insurance companies Continental Heritage, CannGen, Golden Bear, James River, Kinsale, and Conifer. With the exception of Continental Heritage, we are aware of the remaining insurance companies offering product liability insurance to the cannabis industry.
One Insurance Carrier Breaks Away from the Pack
Continental Heritage appears from the graphic to include coverage for claims related to Racketeer Influenced and Corrupt Organizations Act (“RICO”), Mold, Fungi, Bacteria, Asbestos, Silica, and Lead. Furthermore, Continental Heritage includes coverage for Mental Illness, Cancer, Birth Defects, Heart Disease, Communicable Disease, Respiratory Disease, and Cannabis Intoxication.
Admitted monoline Products Liability Insurance specifically for the cannabis industries in CA & NV.
Coverage Highlights – Scheduled Cannabis, Hemp and CBD Products – Defense outside of limits – Covers injuries stemming from intoxication, impairment – Includes vapor cartridges pic.twitter.com/08ywZA7qBt
Message to Cannabis Insurance Carriers: “That is racketeering activity under 18 U.S.C. § 1961(1)(D).”
A lawsuit filed in Massachusetts on September 7, 2017 demonstrates just how far attorneys will go to seek recovery for damages from other businesses when filing lawsuits against cannabis licensees.
The case (CRIMSON GALERIA LIMITED PARTNERSHIP, RAJ & RAJ, LLC, HARVARD SQUARE HOLDINGS LLC, and CHARLES RIVER HOLDINGS LLC Plaintiffs, v. HEALTHY PHARMS, INC.; et. al.) is about neighbors who weren’t happy to have a store selling pot and decided to file a lawsuit.
Marijuana businesses attract undesirable individuals according the the lawsuit
The legal documents harshly describe those who visit Healthy Pharms as being less than desirable. “Marijuana businesses make bad neighbors, which include and without limitation, emitting pungent odors, attracting undesirable individuals, increasing criminal activity, driving down property values, and limiting the rental of premises.”
Plaintiff’s lawyers cast a wide net to include insurance “providers”
The list of those being sued or named as defendants include the City of Cambridge, Massachusetts Department of Health, Century Bank and Trust Company and a list of “John Doe’s.” Attorneys will use a fictitious name like John Doe when parties to a lawsuit are unknown at the time of filing the lawsuit, but would like the option to add those parties as the case develops.
In this circumstance, John Doe 2 and John Doe 3 are both providers of insurance to the various cannabis related companies. John Doe 2 is the insurance provider of general liability insurance to Healthy Pharms, 3 Brothers, or Red Line for a marijuana cultivation facility. John Doe 3 is the provider of property insurance to Healthy Pharms, Timbuktu, or Red Line for the medical marijuana dispensary.
The entry point to include insurance providers references the insurance obligations from the lease agreement between Healthy Pharms and Timbuktu that require meeting liability limits of $1,000,000 per occurrence and $2,000,000 per aggregate. By meeting those limits of liability through a insurance contract, the insurance carriers have further the RICO activity the lawsuit alleges.
Upon information and belief, John Does 1, 2, 3, and 4 issued insurance policies with the intent to further Healthy Pharms, Timbuktu, 3 Brothers, Red Line, and their respective officers, directors, managers, investors, assigns, nominees, and/or affiliated persons to commit crimes under the CSA in violation of 21. U.S.C. § 846.
That is racketeering activity under 18 U.S.C. § 1961(1)(D).
The plaintiff lawyers did not specify if insurance provider is broader term to include the insurance broker or retail agent who sold the policy, underwriters and surplus lines brokers involved in underwriting, and inspection companies who may have been involved in some manner.
If it means all of the above, this lawsuit is a strong message to the cannabis insurance industry that plaintiff’s lawyers are seeking deeper pockets to pay for these lawsuits.
Who is John Doe Insurance Provider?
Has Healthy Pharms Et al. tendered defense to their cannabis insurance carrier?
If they haven’t, it would be prudent to notify their insurance broker and carrier of the legal circumstances as required by most insurance policies under Duties in the Event of Loss or Damages. The failure to notify the insurance carrier within a reasonable time frame may result in the claim being denied.
The cannabis insurance carriers will have a negative attitude on the subject as they evaluate how they could have foreseen this type of legal action, while thanking the insurance committee for identifying the exposure.
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS Case 1:17-cv-11696-ADB
CRIMSON GALERIA LIMITED PARTNERSHIP, RAJ & RAJ, LLC, HARVARD SQUARE HOLDINGS LLC, and CHARLES RIVER HOLDINGS LLC Plaintiffs,
HEALTHY PHARMS, INC.;TIMBUKTU REAL ESTATE, LLC; PAUL OVERGAAG, an individual; NATHANIEL AVERILL, an individual; 4FRONT ADVISORS, LLC; 4FRONT HOLDINGS LLC; KRISTOPHER T. KRANE, an individual; 3 BROTHERS REAL ESTATE, LLC; RED LINE MANAGEMENT, LLC; JOHN DOES 1 THROUGH 4; TOMOLLY, INC.; CITY OF CAMBRIDGE, a body politic; TOWN OF GEORGETOWN, a body politic; MASSACHUSETTS DEPARTMENT OF PUBLIC HEALTH; CENTURY BANK AND TRUST COMPANY; MAURA T. HEALEY, in her official capacity as Attorney General of the Commonwealth of Massachusetts Defendants
These committees are a opportunity for members with particular expertise to volunteer and effect change. In April of 2018, the committee released their publication entitled “Protecting Your Cannabis Business: A Commercial Insurance Review” to educate the cannabis industry on types of coverages available, purpose of those coverages, and citing examples of when coverage would be offered.
Besides the RICO lawsuit, the committee cited other examples covered by general liability insurance include a customer who slips and falls, repairman bitten by a dog, and product disparagement claim brought by a competitor.
What is RICO?
RICO is a violation of United States Federal law enacted under U.S. Code Title 18 Chapter 96 of the Organized Crime Control Act of 1970. There is a criminal and civil component to the statute. The law specifies offenses known racketeering activities such as arson, bribery, extortion, gambling, murder, kidnapping, and dealing in a controlled substance such as marijuana that is part of ongoing criminal enterprise.
The party claiming RICO must be able to prove damages exist in addition to other important elements. The injured party may sue in federal court and collect three times the damages they have sustained including the cost of the lawsuit.
Is a RICO Lawsuit considered Accidental?
Generally speaking, the purpose of commercial general liability policy is to offer coverage for the accidental, uncertain, and fortuitous losses to a third party. This purpose has evolved over time, but remains a foundation to the history of insurance. The cannabis licensee purchasing insurance is knowingly and intentionally operating a business in violation of federal law. The RICO lawsuit will be a response by a third party due to the licensee’s conduct and does not appear accidental.
If the cannabis licensee’s conduct is certain and intentional, then cannabis insurance carriers might deny the claim based on this fact.
Does a RICO lawsuit meet the Definition of an Occurrence?
In our experience, the sections below from a cannabis insurance policy may provide additional insight on how a RICO claim or lawsuit would be treated from a policy perspective.
The typical insuring agreement will state the following:
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.
There are several key terms within the insuring agreement such as “for which this insurance applies” or “to which this insurance does not apply.” This language seems insufficient to consider if a RICO claim would or would not be covered.
The insuring agreement does provide several conditions of which one condition would be noteworthy in our opinion as it pertains to this type of claim:
The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”;
Many insurance policies define occurrence to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurance carriers and courts may evaluate closely if RICO meets the definition of an occurrence with emphasis on the word accident. Various sources define accident as being unforeseen, unplanned, and unexpected that can be associated with acts of God. Using the example cited by the committee, the operating dispensary whose neighbor files a RICO claim is a consequence of their licensed distribution of cannabis.
For most people, a lawsuit of this nature would be difficult to quantify as being in the same category of a car accident or customer falling in the parking lot. Both of these events were uncertain. The filing of a lawsuit isn’t accidental, but a legal response by a party who believes they’ve suffered harm due to a known violation of federal law.
Is RICO excluded on the cannabis insurance policy?
Exclusions are specific policy language meant to inform the policy holder when coverage is not offered. The insurance carrier’s “carve out” the risk they don’t want to cover. We’re unaware of commercial general liability policies excluding RICO lawsuits.
RICO has been excluded in other cannabis insurance policies such as product liability and directors & officers insurance.
Is RICO covered or not?
Based on our experience, we don’t see a clear path exists through a commercial general liability policy to offer coverage for RICO claims and lawsuits unless the committee has insurance carriers offering this type of coverage with policy language to support their claim. Furthermore, there are cannabis insurance policies that may require the customer to reimburse the insurance company for the cost of the claim as a result of the loss not being covered. This would be a harsh consequence for the cannabis licensee.
If RICO lawsuits are filed, the insurance carrier responsible for the claim may issue a reservation of rights letter to initially defend the lawsuit, while they determine if coverage should be offered through trial or settlement. Reservation of rights letter are common practice used by claims departments to temporarily investigate a claim, while providing the carrier the right to terminate their obligations at any time.
The first hurdle will be the insurance industry determining if a RICO lawsuit is an insurable risk due to the certainty of a cannabis licensee violating federal law. The second hurdle will be meeting the definition of an occurrence and accident.