United States: Sixth Circuit Weighs In On Coverage For Marijuana-Related Property Loss

Last Updated: October 9 2018
Article by John C. Pitblado

The Sixth Circuit Court of Appeals issued a colorful opinion in a property insurance coverage dispute affirming a denial of coverage for loss arising out of an illicit marijuana growing operation in Michigan. The case is captioned K.V.G. Properties Inc. v. Westfield Ins. Co., No. 17-2421 (6th Cir. Aug. 21, 2018).

The insured was the lessor of commercial properties, including a property leased to certain tenants who, unbeknownst to the lessor, built a large-scale marijuana growing operation, including numerous modifications to the building itself. Federal agents raided the operation. It is unclear from the record what the arrests/charges were based on, or whether any of the tenants were ultimately convicted. But they left behind some $500,000 in damage to the lessor's property, including holes cut in the roof and other modifications to the ventilation system. The lessor/insured sought coverage under its property policy. The insurer declined coverage.

The insurer analyzed the claim under the Building and Personal Property Coverage Form ("Policy"), pursuant to which the insurer agreed to pay for "direct physical loss of or damage to Covered Property . . . caused by or resulting from any Covered Cause of Loss." The Policy also contained an exclusion for "loss or damage caused by or resulting from" any "[d]ishonest or criminal act by you, any of your partners, members, officers, managers, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose."

The insurer relied on the 'criminal acts' exclusion in declining coverage, and the insured brought a declaratory action seeking a finding of coverage. A Michigan federal district court found in favor of the insurer on summary judgment, citing the exclusion, and the insured appealed to the Sixth Circuit.

The Sixth Circuit affirmed and provided some thoughtful analysis on numerous issues, including some not raised by the parties. The result is (1) a helpful lesson to coverage and appellate lawyers about abandoning or failing to raise arguments, and (2) a reminder that growing marijuana is still sometimes considered a crime.

A Potential Winning Argument Abandoned

For the exclusion at issue to apply, the dishonest/criminal act must have been committed by the insured, or "anyone to whom [the insured entrusts] the property." This language piqued the Sixth Circuit's interest, and it appeared poised to provide some thoughtful analysis on the issue. Does "lease" mean the same thing as "entrust," for example? Is landlord-tenant a "trust" relationship? As the Court noted in a footnote, "[t]he list of roles does not include tenants, and there is some question about whether this exclusion should apply to someone who obtains 'entrustment' by false pretenses."

But the Court declined to rule on this point, noting that coverage counsel for the insured explicitly declined to raise the argument. "[The insured] has expressly chosen not to discuss this element or argue it in favor of reversal." It salted the wound by pointing to the insured's brief as evidence: "See Reply Br. at 5 ('Importantly, whether the property is entrusted to the tenant is a question that the Court need not resolve . . . .')." Thus, the Court declined to rule on this issue, as it does not "answer questions that 'merely lurk in the record' and are not asked by the Parties." (citation omitted). Ouch.

Marijuana Is Still Illegal

The more interesting analysis is in the Court's discussion of the legality of marijuana under Michigan and federal law. While its ultimate finding that marijuana is illegal supported application of the criminal acts exclusion, this case does not necessarily contradict a similar opinion issued by a Colorado federal court in 2016 ( discussed here), which found coverage for a marijuana grower (in that case, the insured) based on its assessment that the status of federal marijuana laws at that time was such that a similar exclusion was "rendered ambiguous by the difference between the federal government's de jure and de facto public policies regarding state-regulated medical marijuana." The Green Earth Wellness Center, LLC v. Atain Specialty Ins. Co., No. 13-cv-03452-MSK-NYW (D. Colo. Feb. 17, 2016). The cases are importantly different; however, as in Green Earth, the insured was a legal state-licensed grower, and its insurance policy was specifically underwritten with its operations fully disclosed.

Here, the Sixth Circuit was nevertheless more willing to ignore federal law altogether based on federalism principles, and the fact that it was exercising diversity jurisdiction:

In diversity cases, we act as faithful agents of the state courts and the state legislature. . . . Since the Michigan Medical Marijuana Act was passed by ballot initiative, we would exercise even more care, lest we (as unelected judges) tread directly on the will of the People of the State of Michigan, who cannot easily correct any error we commit. Exercising the Michigan courts' common-law power to interpret public initiatives, we would hesitate before reading a Michigan insurance policy to bar coverage for a "criminal act" when Michigan law confers criminal and civil immunity for the conduct at issue. Mich. Comp. Laws § 333.26424(b) (declaring that a person lawfully cultivating medical marijuana shall not be "subject to arrest, prosecution, or penalty in any manner, or denied any right or privilege" under state law).

The Court also recognized the Department of Justice's "Ogden memo," which expresses a federal policy restricting the use of federal funds to prosecute marijuana operations that are otherwise legal under state law.

Nevertheless, the problem, the Sixth Circuit found, was that the insured failed to submit evidence that its tenants' growing operation was legal under Michigan law. For one, it was prima facie evidence of illegality that the federal government assessed the operation at issue not to be in compliance with state law, since it expended resources in conducting the raid. More tellingly, however, the Court pointed to the insured's own position in an eviction proceeding it initiated against the tenants who had been raided. "In its eviction pleadings against each tenant, [the insured] repeatedly claimed that the '[t]enant illegally grew marijuana' in the unit and stated that the '[i]llegal growing of marijuana' was a 'continuing health hazard.'" Ouch, again.

Absent evidence of the marijuana operation's legality under Michigan law, and in light of the insured's own admission that it was, in fact, illegal under Michigan law, the Sixth Circuit held that the insurer met its burden of proving the application of the criminal acts exclusion, and affirmed the declaration of no coverage. In so doing, it provided some helpful, if somewhat painful, reminders about abandoning/waiving arguments on appeal, and the fact that positional conflicts can and will be used against you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions