Today we’re highlighting an interesting case out of the 6th Circuit. In K.V.G. Properties, Inc. v. Westfield Ins. Co., 900 F.3d 818 (6th Cir. 2018), a commercial landlord was denied insurance coverage for damage caused to his property by tenants who were illegally growing marijuana there. The landlord leased property to a group of commercial tenants for “general office or light industrial business.” Id. at 820. The DEA raided the property and caught the tenants growing “lots of marijuana.” Ibid. In the process, the tenants caused roughly $500,000 of damage to the property. The landlord evicted the tenants and filed an insurance claim. The landlord’s insurer denied coverage due to an exclusion for losses resulting from any “[d]ishonest or criminal act” by persons to whom the property was entrusted. The landlord sued the insurer, removed the case to federal court, lost, and appealed. On appeal, the 6th Circuit affirmed the district court’s ruling, addressing two interesting issues in the process.
First, the court discusses whether to apply state or federal law to determine if a loss results from a “criminal act.” At the time of the loss, medical marijuana was legal in Michigan under the Michigan Medical Marijuana Act. The court states that “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.” Id. at 822. The court eventually determined that the tenants’ activities were criminal under both state and federal law (more on that below), and so their musings on federalism are not precedential, but it is interesting to note that the 6th Circuit Court of Appeals appears open to the idea of ignoring the federal prohibition on cannabis and applying state law when considering issues governed by state law (such as insurance coverage).
Second, the 6th Circuit provides an important piece of tactical advice for landlords of cannabis businesses. The 6th Circuit ultimately determined that the question of state or federal law doesn’t need to be answered, because the tenants’ activities were illegal under both state and federal law, and therefore were “criminal acts” regardless of the choice of law. They reached this conclusion due in part to the presumption of illegal activity created by the DEA raid, but primarily due to the landlord’s own assertions in the eviction proceeding, including the statement that “[t]enant illegally grew marijuana” and that the [i]llegal growing of marijuana” was a “continuing health hazard.” Per the Federal Rules of Evidence, pleadings are binding statements that can be admitted as evidence against that party in subsequent legal proceedings. The takeaway here is to know your coverages and exclusions. The landlord likely could have found himself with a winnable federalism argument about what constitutes a “criminal act” had his attorney carefully tailored the eviction pleadings to avoid assertions of criminal conduct. Whatever was gained by a speedy eviction was lost by pleading into an exclusion from insurance coverage.
If you are a landlord considering evicting a cannabis business, contact us today. Our cannabis and real estate teams are experienced in these kinds of interdisciplinary issues, and stand ready to assist.