Our Cannabis Business Insurer Denied Our Claim. What’s Next?
Like companies in any other industry, licensed cannabis companies typically carry insurance and sometimes find themselves at odds with their cannabis business insurers. Those companies purchase a policy to cover a specific risk for a stated premium and when that risk presents itself, their business insurers suddenly have fine-print explanations for everything.
In these situations, gone are the broader conversations about coverage for theft, or insuring the risk of a fire, or the downside protection available for financing. Suddenly, those broader conversations are replaced with terms and phrases like “subrogation,” “failure to cooperate,” “timely notice,” and “reservation of rights.” Many cannabis companies in this position find themselves wondering what comes next and how they might maximize their chances to collect any coverage for the premiums they paid.
Often, when a business insurer denies a claim for any reason, the policyholder must institute a “coverage action” alleging breach of contract claims, seeking declaratory relief, or both. In some circumstances (involving particularly ornery insurers) claims for bad faith might also be available. Depending on the particular claims at issue, and the resources available for litigation, cannabis policyholders should prioritize three primary before at the commencement of any coverage action.
Where should we sue?
First, cannabis policyholders should decide whereto institute the action. Typically, this choice involves either state or federal court. The interplay between state and federal law can lead to various procedural battles from the start regarding which law should apply (state or federal), whether there is jurisdiction in that particular court, and whether the action is properly venued.
Generally, cannabis policyholders seeking to commence a coverage action against their insurers should weigh the costs and benefits of selecting state court (in a jurisdiction that might view cannabis goods or services more favorably) or federal court (in the event that a state-court lawsuit would be too close to the insurer’s home). Depending on whether there is diversity of jurisdiction between the policyholder and the insurer, a cannabis policyholder filing an action in state court may face a removal motion and end up in federal court. Either way, it is important that strategic consideration be given to the forum for the dispute.
When should we sue?
Second, cannabis policyholders should decide when to institute the action. Generally, a dispute between a cannabis policyholder and its business insurer should be governed by typical rules and timelines governing breach of contract claims and declaratory judgment actions.
Both breach of contract claims and causes of action for declaratory relief carry statutes of limitations governing when a policyholder may bring a claim against its insurer. Here, it is important that the policyholder ensure that it has satisfied all administrative steps with its insurer–i.e., properly submitting a claim for coverage, cooperating in any investigation of the claim, and generally fulfilling the policyholder’s duty to cooperate.
Once the policyholder determines the proper statute of limitations, it should then consider how long it should wait prior to actually instituting the action. A good rule of thumb is, statute of limitations allowing, a policyholder should not file until it believes it has a prima facie case demonstrating coverage, and shifting the burden to the insurer to show that coverage should not apply.
Cannabis policyholders will not always have the benefit of every document necessary for this showing and may need to adjust and account for any discrepancies or deficiencies in evidence. But the prudent cannabis company should not institute an action without confidence in its ability to prove up its claim, rather than just shame its insurer.
Who should we sue?
Third, cannabis policyholders should decide who to sue. It is axiomatic that the cannabis policyholder’s insurer is a necessary party to the lawsuit. However, some other necessary parties may not be immediately evident. For instance, if the cannabis policyholder has two different insurers covering the same time period (even for different risks), the prudent policyholder will determine whether both insurers are a necessary party even if it believes only one insurer is on the risk. (As a general rule of thumb, pleading claims against any potentially responsive insurer is the best practice, with the added benefit of third-party practice between them). Failure to name a necessary party can, in some circumstances, lead to dismissal of the suit.
Who should help us sue?
Harris Bricken’s coverage lawyers are seasoned veterans in counseling cannabis policyholders (and insurers) about their rights and obligations when faced with a coverage dispute, as well as cannabis business insurance more generally. If you are unsure about what comes next with your cannabis business insurer, we can help you navigate coverage and maximize your collection on the premium you paid.
For more on cannabis business insurance litigation and coverage disputes, check out the following: