Sue your cannabis insurer? Choose your battlefield wisely


If you do sue your cannabis insurer, read this first. The location where you schedule your submission is of the utmost importance.

The status of marijuana as a Plan I narcotic drug has turned a legal battle with cannabis insurance companies into a little chess game. Many cannabis companies enjoy the benefits of government legalization and the ability to freely insure their operations. However, this does not affect the limitations of federal law.

One underestimated challenge that arises from this legal conflict is deciding where to sue an insurer that fails to meet its obligations under a cannabis insurance policy. The wrong choice could cause a lawsuit to fail in the first place.

Choose your battlefield

As a rule, an attorney has the choice between bringing an action before a regional or federal court. The first important legal element is the seat of each party. The second is where each party does business.

Litigation in federal courts, when available, can have many benefits. This includes the ability to sue your insurer outside of their “home court” (where they are based) or in a more canna-friendly jurisdiction. At least one non-cannabis plaintiff can choose: state or federal? Canna litigants, however, should add an extra layer to their decision.

Federal courts hearing a lawsuit based on diversity jurisdiction typically apply the law of the state that is applicable to the dispute. A court determines the applicable law by: 1) examining a choice of law clause in a contract, or 2) assessing which state has the most significant relationship with the dispute.

For example, an insurance contract between a cannabis company and an insurer may provide that Washington law applies to disputes. In the absence of a choice of law clause, the place where most of the insured activities were carried out determines the applicable law.

But how have federal courts responded to the application of canna-friendly state law in a forum where federal law anticipates underlying state concerns? The answer is mixed.

When it comes to enforcing cannabis insurance contracts, the courts are divided

In 2012, a Hawaii District Court issued a troubled verdict affecting the cannabis industry. The court found that the cannabis business policyholder had an insurable interest in marijuana but was prevented from taking out the policy. The court argued that doing so would violate federal law.

Four years later, in 2016, a Colorado district court found the opposite. This court found that the insurable interest could is enforced. The court reasoned that the insurer had knowingly and willingly taken out the policy, with the full intention of enjoying the benefits of Colorado state law.

Where do we go from here

This dichotomy has forced cannabis business policyholders to carefully consider where to sue their insurers. It arguably robs cannabis companies of some of the benefits of standing in federal court. Note that federal court can be tricky for cannabis companies even outside the context of cannabis insurance disputes.

The law has not yet been fully clarified on this issue. Choose your battlefield wisely in the event of a dispute with your insurer. Harris Bricken’s insurance attorneys have experience litigating disputes with insurers in state and federal courts. We can help with this assessment.