Following marijuana legalization in the state, an insurance agent in Colorado believes he has a niche sales opportunity and would like to insure retail stores, production facilities, shipping firms and more.

Q: "The agent’s carriers use ISO policy forms like the CP 00 10 Building and Personal Property Coverage Form and CP 10 30 Special Causes of Loss form. Would these forms would cover the theft or destruction of marijuana?"

A: “Under Property Not Covered, the ISO CP 00 10 excludes ‘Contraband, or property in the course of illegal transportation or trade.’ According to our sources, the word ‘contraband’ denotes any item that, relating to its nature, is illegal to be possessed or sold.

Although it is legal to sell or possess marijuana in Colorado under certain conditions and in certain amounts, marijuana is classified as a Schedule 1 substance under the Federal Controlled Substances Act—meaning it is illegal under federal law to sell, transport or possess marijuana. So, even if it’s legal at the state level, it’s not at the federal level—and the policy language says it’s not covered if it’s illegal, without regard to what law makes it illegal.

One of the best analyses we’ve seen on this issue is ‘Marijuana Legalization: Implications for Property/Casualty Insurance’ by Brenda Wells, Ph.D., AAI. The article cites Tracy v. USAA Casualty Insurance Company (2012) Civil No. 11‐00487 LEK‐KSC, 2012 WL 928186 (D. Hawaii Mar. 16, 2012), in which the court agreed with USAA that:

• ‘Because the plants were illegal under Federal law, to enforce the policy coverage for the marijuana would be against public policy.’
• There was a lack of insurable interest, which ‘means any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage.’

In the case, though, where marijuana sale and possession is legal by state law, one would think this constitutes ‘any lawful’ economic interest and creates an insurable interest—though it leaves the ‘contraband’ issue on the table.

Don Malecki, CPCU wrote about this issue in ‘Coverage for Marijuana Plants is a Little Hazy’—but takes a different approach in reviewing Tracy v. USAA, especially in the context of a homeowners policy.

So, is destruction or theft of marijuana covered by ISO homeowners and commercial property forms? The answer is the all-too-familiar ‘maybe; maybe not.’”

Bill Wilson is director of the Big “I” Virtual University.

This question was originally submitted by an agent through the VU’s Ask an Expert Service. Answers to other coverage questions are available on the VU website. If you need help accessing the website, email logon@iiaba.net to request login information.