Tenants and Marijuana: What's a landlord to do?

...remains illegal under federal law, insurers have some discretion to deny coverage for marijuana-related losses, as long as they do so consistently and not arbitrarily.

A precedent was established in 2012, when a federal court in Hawaii upheld USAA’s denial of property coverage for loss to a woman’s marijuana plants on the basis that they were illegal substances under federal law. (The company had earlier offered a settlement, but she declined it.) Significantly, the court ruled for the insurer even though the marijuana was used for legalized medicinal purposes.

Even with that precedent, however, it is not easy for state- regulated insurers to avoid paying for damage to a structure or personal property arising from a legal use of a substance legalized under state law.

The risk doesn’t end there, however.

Shortly after Colorado allowed possession of limited amounts of marijuana for recreational purposes, fire departments in the state noted an increase in house fires arising from operations using open flames to extract “THC” oil, the substance that creates a “high,” from marijuana plants.

Insurers are far more likely to deny coverage in such a case, and sustain the denial, by arguing that such processing, if not illegal, is a material increase in the risk not contemplated by the policy. Insurers have been known to deny coverage for building damage related to marijuana use by a tenant. That’s one more reason why it is always important to verify, at least once a year, who your occupants are and how they are using your property.

Therefore, landlords must first check with their own insurers to determine whether any loss arising from marijuana use by a tenant might be excluded. If so, there are emerging sources of coverage for marijuana-related losses in what’s called the “surplus lines” or “non-admitted”market for insurance.

Provisions

Once a source of insurance coverage is established, landlords can identify the legal and practical limits of managing their exposure to marijuana.

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Tenants and Marijuana: What’s a landlord to do?

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Sheila E. Salvatore, Editor | Editor@AdjustersInternational.com | 126 Business Park Drive | Utica, NY 13502

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To that end, it may prove problematic to draft lease provisions seeking to explicitly regulate where and how a tenant can use marijuana. Such an approach would implicitly put the landlord in a position of conceding that marijuana use is legal to some extent, a contention most landlords are not qualified to make.

A safer approach, at least from a legal and risk management perspective, would be to ban smoking of any substance, legal or illegal, and to prohibit unlicensed sales of any products— again, legal or illegal—on the premises.

In addition, landlords could consider prohibiting indoor growing operations which, in the case of marijuana, have been known to increase humidity and foster mold, as well as prohibiting processing operations, such as the processing of THC oil, which have caused building fires.

In the last two potential solutions, lawyers will need to fashion language that distinguishes unwanted growing and processing operations from ordinary gardening and cooking, but that is not insurmountable.

By regulating behaviors rather than a substance, landlords can keep their properties attractive to a wide range of prospective tenants.

PROTECTING YOUR PROPERTY

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