Insurance cover goes bhang due to poor wordings

A legal dispute in the US highlights the need for policy language to be clear and unambiguous says Hiscox's Contract Wordings Specialist - Steve Dyke.

An ongoing dispute between real estate manager KVP Properties and its insurer Westfield Insurance Company over the landlord’s tenants' marijuana growing operation in the US has raised questions for the insurance industry over the effectiveness of exclusions in policy wordings used by commercial insurers, and what happens when state and federal laws conflict.

Claim goes up in smoke

After a Drug Enforcement Agency raid revealed tenants had been leasing a property to grow marijuana in commercial premises in Michigan, landlord KVP Properties filed a claim with Westfield – its property insurer – for damage done to the property as a result of the tenants' activities. Westfield denied the claim on a number of counts, not least through the 'dishonest and illegal acts' exclusion on the landlord's property insurance policy

Given the difference in the legality surrounding marijuana between state and federal laws, it can be difficult to know where an insured stands in the US when it comes to making sure their insurance adequately covers their property.

Given the difference in the legality surrounding marijuana between state and federal laws, it can be difficult to know where an insured stands in the US when it comes to making sure their insurance adequately covers their property. The fact that some states have legalised marijuana use however doesn’t overcome the fact that it is still an illegal act under federal law which ultimately takes precedence.

For London Market insurers, Lloyd's position, as set out in their Supplemental Requirements and Guidance is currently quite clear: "Unless and until the sale of either medicinal or recreational marijuana is formally recognised by the Federal government as legal (as opposed to non-enforcement directives), underwriters should not insure such operations in any form...in the US."

Wordings must remove any ambiguity

While the legality issue is debated, one lesson to be learnt here is around the precision of the policy language when it comes to exclusions. Wordings have to be tight enough to remove any ambiguity if such a claim arises although, too often, insurers seek to rely on their interpretation of certain words. In this particular case, an argument put forward by the insurer is that it was 'vandalism' that took place in the property – the tenants had to make holes in the walls for pipe work and to put heaters in, and in doing so they damaged the fabric of the building.  For the insurers this intentional damage by the tenants was ‘vandalism’ which triggered the insurance policy’s ‘criminal act’ exclusion.

Wordings have to be tight enough to remove any ambiguity if such a claim arises although, too often, insurers seek to rely on their interpretation of certain words.

Insurers and brokers need to bear in mind the environment – particularly the legal environment – in which the policy wording is used. If an insurer wants to exclude any marijuana operations being conducted in any properties it insures where the legality of the drug is unclear, it needs to have a specific exclusion of marijuana operations rather than rely upon an interpretation of words like 'deliberate' or 'dishonesty' or 'vandalism'. It is a case of being quite clear about what you do and what you do not want to cover.

The industry’s best interests

Policyholders deserve to have tailored, clearly worded language that establishes the limits of their insurance protection.

Ultimately it is in the insurance industry's best interests, not least from a reputational perspective, to be as specific as it can be when it comes to coverage to prevent the ambiguity that can arise from claims where coverage is disputed. Policyholders deserve to have tailored, clearly worded language that establishes the limits of their insurance protection.