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Damage arising from marijuana operations not covered by policy (US)

Published

2018

Mon

03

Sep

 

 

 

Sandra Sithole, Director
Norton Rose Fulbright South Africa Inc.
 

 

 

A US appeals court in August 2018 found that an insurer does not have to indemnify its insured for damage to a warehouse by tenants who converted it into a marijuana growing operation, finding that an exclusion in the policy for losses resulting from criminal acts precluded cover.

The claim arose under the building and personal property coverage section of a standard first-party commercial insurance contract in which the insurer agreed to pay for ‘direct physical loss of or damage to General Property… caused by or resulting from any covered Cause of Loss’.

The policy contained an exclusion that the insurer ‘will not pay for loss or damage caused by or resulting from’ any ‘dishonest or criminal act by you …or anyone to whom you entrust the property for any purpose’. 

The insured, a commercial landlord, leased several units of property to a group of commercial tenants for general office or light industrial business. During 2015, the US Drug Enforcement Agency raided the premises and caught the tenants growing lots of marijuana. The insured immediately evicted the tenants but to accommodate their ‘business’ the tenants had removed walls, cut holes in the roof, altered ductwork and severely damaged the HVAC systems, the repair costs of which were significant.

The insured argued that this was clearly an act of vandalism which was covered by the policy.

The court found that while the insuring clause covered the loss, the ‘criminal acts’ exclusion negated coverage.

The court also rejected the insured’s contention that because no convictions were made, the exclusion for criminal acts can apply only if the wrongdoing results in a conviction. The court said that the insurer’s policy referred to ‘criminal acts’ not ‘crime’ or a ‘criminal conviction’. Requiring a conviction would be too onerous on the insurer in circumstances where the policy imposed no such requirement.

The case is KVG Properties Inc. v Westfield Insurance Co.  

 
Source: Norton Rose Fulbright South Africa Inc.
 
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