A high-profile federal court ruling from Michigan stresses how important it is for landlords to monitor the activities of their tenants. The same decision has provoked discussion about how courts may approach insurance coverage disputes involving businesses engaged in the production or sale of cannabis.
In November 2017, a federal district judge for the Eastern District of Michigan held that insurance coverage was barred based on the violation of several exclusions. The court ruled that the policy’s exclusions based upon illegal/dishonest acts, unauthorized construction or remodeling, and the presence of moisture and humidity blocked coverage for a landlord who had unknowingly leased general office/light industrial properties to marijuana-growing operations.
In K.V.G. Properties, Inc. v. Westfield Insurance Company, KVG owned three commercial properties located in Novi, Michigan. The use of the properties was limited to general office or light industrial businesses. Westfield issued a commercial insurance policy to KVG covering these properties against direct physical loss or damage.
Following a 2015 DEA raid on several of the tenants leasing the space, KVG learned that these tenants had been using the properties to grow marijuana. The cannabis production caused significant damage to the properties: The tenants removed walls, cut holes in the roof, and added HVAC ductwork and gas lines that required service or replacement of the HVAC units in the properties. Damages were estimated at about $500,000.
KVG sought coverage from Westfield, but Westfield rejected that request. KVG then filed a lawsuit against Westfield for breach of the insurance contract and a declaration of coverage.
U.S. District Judge Avern Cohn granted summary judgment in favor of Westfield based upon several policy exclusions:
2. h. Dishonest or criminal act by … anyone to whom you entrust the property for any purpose:
(1) Acting alone or in collusion with others….