May 8, 2017
When Two Sets of Laws Collide
by Brenda Wells, Ph.D.
Never in my life did I anticipate becoming an expert on cannabis legalization. I do not advocate for or against the legalization of marijuana in my research. Instead, I analyze and discuss how existing and future legalization impact the property and casualty insurance industry.
Here’s the quandary: the federal government says marijuana is illegal, but 29 states plus the District of Columbia have said that it is legal for their residents to use medicinally. In addition, seven states plus the District of Columbia have said that it is legal for their residents to use recreationally. That’s a pretty big conflict that has massive implications for the insurance industry.
Federal Versus State
If an insured under a homeowner’s policy has a house fire and has marijuana plants that are legally obtained and possessed (according to state law) destroyed in that fire, does his/her homeowner’s policy have to pay for those plants? If so, how much are they worth? Or, does the federal illegality of the green plant give her insurer the right to deny the claim?
What the Courts Say
The courts to date have had mixed outcomes on this issue. One case, Tracy v. USAA (2012), concluded that the insurer did not have to pay for the plants since they are a Schedule I prohibited substance under the Federal Controlled Substances Act (CSA).
Another case, Green Earth Wellness Center, LLC versus Attain Specialty Ins. Co. (2016) ruled that state law and not federal law governs the insurance contract. The court also ruled that Atain, having entered into the contract knowing the business involved marijuana, could not invoke the federal illegality of marijuana as a reason not to pay a damage claim.
Don’t Do the Laundry
Just for fun, let’s add another twist to this scenario. Anyone who engages in commerce with a marijuana business may be guilty of money laundering under federal law. This is why most banks will not accept deposits from marijuana dispensaries, processors, growers, and even insurance agencies that cover marijuana businesses. Even accepting insurance premium dollars from a marijuana business can make you guilty of a federal money laundering crime! So, many insurers refuse to cover those businesses.
Meanwhile, in states where marijuana is legal, it is often required that marijuana businesses have proper liability insurance. Yet it may be difficult to find an insurer willing to write the coverage, again because of the federal illegality of cannabis.
The IRS Weighs In on Cannabis
Under IRS Code Section 280E, anyone who is distributing Schedule I substances may not deduct the cost of goods sold from ordinary income. Thus, marijuana dispensaries may not deduct their business expenses from income, but, they are still expected to pay federal income tax on their revenue.
The President’s Opinion
The Trump Administration has given some indication that it intends to take action against recreational marijuana businesses, even though they are abiding by their respective state laws. I’m not sure exactly how they will do that since the 2014 Federal Spending Bill prohibits spending federal funds on enforcement of the CSA in states that have legalized marijuana.
Public Opinion
A majority of Americans surveyed indicate that they approve of the legalization of medical marijuana. A majority surveyed also indicate that they don’t care if marijuana is used in the privacy of someone else’s home. Will federal law catch up with public sentiment? If so, when will that happen? I really don’t have any predictions about that. But rest assured, I’m keeping my eye on the situation.
Brenda Wells, Ph.D., CPCU, AAI, CRIS is the Robert F. Bird Distinguished Professor of Risk and Insurance in the Department of Finance and Insurance, College of Business at East Carolina University. She is also the owner of Risk Education Strategies, an insurance and risk management consulting firm. She can be reached at wellsbr@ecu.edu.
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