Even if marijuana may be legal where you live, there’s a good chance your property policy won’t cover damages resulting from its sales, operations or growth. That’s because such activity is still considered a crime under federal law.

Highlighting the inconsistency between state and federal law is the common “dishonest or criminal acts” property policy exclusion, which allows national carriers to deny claims even in states with legalized marijuana.

In a recent Michigan case, a landlord submitted a $500,000 damage claim to its property insurer after marijuana-growing tenants removed walls, cut holes in the roof and severely damaged the property’s HVAC systems. A local federal appeals court ruled the damage was not covered by the landlord’s property policy due to the criminal acts exclusion, leaving policyholder to cover the costs of repair.

The criminal acts exclusion has been upheld in many cases tried so far in states with legalized cannabis - whether a retail outlet was vandalized/burglarized, or a growing/extraction operation caused damage resulting from mold or harsh chemicals.

Further complicating the situation is the fact that obtaining property insurance in the first place is a challenge for both cannabis companies and their landlords. Even when engaging the few carriers that provide reliable, dedicated cannabis property coverage, limits are restrictive, coverage can be deficient compared to the standard insurance policies and premiums are costly. Not disclosing your cannabis operations to a property carrier could pose an even greater liability – and is an inevitable recipe for claims denial.

Consider the following four best practices for landlords with cannabis operation outlets:

  1. Read your insurance policy. A number of carriers claim to cover cannabis tenants, but not all policies are created equal. Ask about the dishonest and criminal acts exclusion, review proposed limits and even run potential scenarios past your underwriter. It is not uncommon for a reliable underwriter to agree to include cannabis in the landlord’s property policy, only to have related claims denied by an adjuster, citing the criminal acts exclusion. Finding coverage may mean you ultimately have to sue your own insurance company.
  2. Read your tenant’s insurance policy. Don’t rely on a certificate of insurance upon rental; ask to read the full language of the tenant’s policy to ensure it complies with your lease agreement. If their policy is deficient and their assets are seized, you will be left to pick up the pieces as the tenant has nothing left to indemnify you with.
  3. Mandate tenant risk management practices. Make sure your cannabis tenants have sound risk management policies and procedures in place. This includes checking individuals that come into the retail store, upholding state laws in plant cultivation and protecting storefront theft. Depending on the type of cannabis operation, pollution and environmental concerns may exist which are not typically covered by standard insurance policies. Extraction operations can be dangerous with increased fire and explosion risks.
  4. Engage a subject-knowledgeable attorney. A few local and national law firms are well versed in state cannabis laws, claims and risk management. Before purchasing property insurance, or contracting with a cannabis tenant, check with a knowledgeable attorney.

HUB’s real estate and cannabis specialty can help safeguard your portfolio from the risks and challenges unique to cannabis exposures, institute risk management practices and procure the right insurance policy. Contact the HUB Real Estate team today. Additionally, you can learn more about HUB’s property management insurance here!