A Sixth Circuit appeal from a Michigan court ruling may prove troublesome for property owners in the cannabis industry.  If the Sixth Circuit affirms the lower court’s decision, it would set a precedent whereby a landlord may be denied insurance coverage for damage done to his or her property by a third-party tenant who, without the landlord’s knowledge, used the property to illegally cultivate cannabis.  The real issue becomes apparent, however, when a landlord knowingly permits a tenant to cultivate cannabis on its property in compliance with state law but in violation of federal law.

This begs the question; if a property owner uses or permits the use of its property as a state compliant cannabis grow facility, can that property owner be confident that he or she will not be denied coverage?

In the case soon to be before the Sixth Circuit, K.V.G Properties, Inc. v. Westfield Insurance Company, the insurer’s position relies on an exclusion in the landlord’s insurance policy that denies coverage for loss or damage caused by or resulting from dishonest or criminal acts by a landlord or anyone to whom the landlord entrusts the property for any purpose.  Focusing largely on the above illegal acts exclusion and the fact that the tenant’s cannabis cultivating operations were illegal under federal law, the lower court ruled in favor of the insurer.

In its appeal, the landlord, K.V.G. Properties, Inc. (“KVG Properties”), asserts that the insurer cannot justifiably deny coverage by invoking a vague, broad, and convoluted illegal acts exclusion. Specifically, KVG Properties highlights that the exclusion cannot be invoked when the conduct is uncertain to be illegal under applicable state law and when the federal law largely relied upon is rarely enforced. If the Sixth Circuit agrees with KVG Properties’ reasoning and reverses the lower court’s ruling, it would provide more clarity on this issue for property owners using or permitting the use of their property as a state compliant cultivation facility.

Notwithstanding the arguments presented by KVG Properties on appeal, the Michigan lower court ruling establishes that landlords cannot assume that simply because conduct is legal under state law, that they’re protected from being denied coverage for conduct that is still deemed criminal under federal law. Ultimately, the outcome of each insurance claim for coverage is determined principally by specific facts and policy language. Property owners should consult with counsel prior to using or permitting the use of their property for cannabis-related uses.

Special thanks to Melanie M. Lupsa, Summer Associate, for her contributions to this article.