How insurers can defend against cannabis claims post legalization

After Canada legalized cannabis in 2018, the P&C insurance industry braced for claims. But from a legal perspective, how insurers can defend these claims remains a work in progress.

Nero v. Allstate is one of the few cases Ontario courts have considered since the legalization of cannabis. It involved a motion to amend a statement of claim arising from a 2019 fire in the rented home of an insured.

During the initial investigation, an expert concluded a fire that damaged the premises was caused by the ignition of gaseous butane being used to extract THC from the cannabis plant to create a resin.

After reviewing that expert opinion, Allstate denied coverage based on the ‘grow-op’ exclusion. Following discovery, the plaintiff attempted to amend their claim to add allegations that the underwriting policy constituted discrimination, referencing provisions of the Insurance Act.

During the plaintiff’s motion to amend their statement of claim, an associate justice found a complaint citing the Human Rights Code amendments could, in fact, piggy-back on the existing claim. The fundamental issue of whether an insurer can rely on the language of the ‘grow up exclusion’ will have to be addressed during the trial.

Legal evolution

Prior to cannabis legalization, the leading Ontario case was Pietrangelo v. Gore Mutual, which also arose when tenants caused an explosion while trying to extract cannabis resin. The Court of Appeal for Ontario upheld the insurer’s denial of that claim.

Ontario’s Court of Appeal also rejected a plaintiff’s bid to overturn an insurance policy exclusion, this time by seeking to have a new law apply to the exclusion retroactively. The Supreme Court of Canada dismissed leave to appeal in Lin v. Aviva Insurance Company in February 2023.

But it’s not a sure thing an insurer’s cannabis exclusion will hold up in the Ontario courts.

In Stewart v. TD Insurance, for example, an Ontario lower court found the plaintiff’s authorization to possess medical marijuana meant the ‘grow op’ exclusion didn’t apply, since the specific policy language required criminal offences to take place or illegal substances to be involved.

Elsewhere, other Canadian jurisdictions have generally upheld insurance policy exclusions.

In one case, Carteri v. Saskatchewan Mutual Insurance Company, which also arose from an explosion and fire due to a tenant attempting to extract marijuana resin, the justice adopted similar reasoning to what was applied in Pietrangelo.

Alberta’s Court of Appeal also upheld a denial in Lafferty v Co-Operators General Insurance Co., although, at the appellate level, the insured’s appeal did not address whether the loss fell within the illegal drug operation exclusion.

B.C. judges have also allowed insurers to rely on the material change in risk associated with grow-ops, even legal ones, to void policies (Schellenberg v. Wawanesa Mutual Insurance Company and Drechsler v Canadian Northern Shield Insurance Company). However, the B.C. Supreme Court has rejected claims denials based on the grow-op exclusion in circumstances when the causal connection between the grow-op and the loss was not proven (Davidson v. Wawanesa Insurance Company).

U.S. approach

While many U.S. states have a longer history of cannabis legalization, federal criminalization creates special circumstances. In some cases, insurers in the U.S. have successfully relied on federal law and public policy, such as in Tracy v. USAA Casualty Insurance.

Denials have been less successful in cases when the insurer had knowledge of marijuana, and thus knew the nature of the risk, like in Green Earth Wellness Centre LLC v. Atain Specialty Insurance Company, decided in Colorado.

U.S. judges are also likely to consider the nature of a plaintiff’s actions and whether they constituted an increased hazard. If so, then insurers may be successful in denying coverage, as a Michigan justice upheld in Nationwide Mutual Fire Insurance Company v. McDermott.

Navigating exclusions

Historically, insurers have been able to rely on grow-op exclusions.

No definitive cases have considered such exclusions for post-legalization losses. But the jurisprudence suggests these denials may face new challenges due to legalization as well as the legislation, including amendment of the Insurance Act to protect ‘innocent’ parties.

Any policies still relying on cannabis use being an illegal or criminal activity are likely to fail. But insurance policies explicitly excluding marijuana as a risk, based on the increased risk of fire or other property damage, and not on illegality, will be in a better position to deny coverage.

Cases in B.C. that focus on a material change in risk suggest another, potentially more successful, line of defence to actions resulting from cannabis claims.

Granting of coverage will remain an individual assessment on each set of facts, with courts turning an inquiring mind to what risk the parties contemplated at the time of entering into the policy.

Shannon R. Wood is a Partner at ZTGH LLP and chair of the firm’s Cannabis practice group. Feature image by iStock/Cannabis-Pic