While recreational users of marijuana have counted down the days to October 17, 2018, the insurance industry has been preparing for the resulting changes, risks and opportunities that will occur as a result of the legalization of marijuana in Canada. With the passing of Bill C-45-The Cannabis Act, there is a new legal landscape that will impact premiums, coverages and claims. The legalization of recreational marijuana will have far-reaching impacts across many different lines of insurance, and will likely take years to fully measure and understand. Insurers must consider the consequences that legalization will have on their current standard policies including amendments to the wording to reflect the new law, and potential variations in the requirements across the country. Although this article deals with legalization related to homeowners insurance, there will be impacts on commercial general liability and automobile insurance as well.
According to Statistics Canada, in 2017, almost 5 million Canadians between the ages of 15 to 64 purchased both medical and recreational cannabis, spending approximately $5.7 billion in the process. Nearly all of the cannabis consumed in Canada was produced in Canada. These figures are expected to increase now that cannabis has been legalized.
The Cannabis Act allows adults (18 or 19 years of age, depending on the jurisdiction) to legally purchase, possess, share, cultivate and alter limited amounts of cannabis for recreational means.
The Act permits the cultivation of four plants per “dwelling house”. This limit applies regardless of the number of adults living in one house. The Act does not restrict the growing of cannabis plants indoors and appears to contemplate that people will be able to grow the plants in their gardens, yards, or greenhouses.
According to the legislative provisions, provinces will have the ability to impose additional requirements on personal cultivation and possession limits. As a result, there could be varied restrictions and/or requirements from province to province. All insurers who underwrite business in multiple provinces will need to be aware of potential variations in recreational cannabis requirements across the country.
The Act also permits individuals to make cannabis-containing products (such as edibles), provided that dangerous organic solvents are not used in making them.
Although large-scale, personal growing operations (“grow-ops”) will remain illegal and void most homeowner insurance policies that are faced with related claims, the Act permits the cultivation of cannabis plants at home, as noted above. Personal cultivation of cannabis will introduce another peril that is currently excluded under homeowners insurance. Specifically, an indirect or direct loss or damage to a dwelling used in the processing or manufacturing of marijuana. This exclusion will need to be amended to reflect the new law.
The typical homeowner’s policy includes some form of relatively standard criminal and intentional act exclusion. Under the new legislation, marijuana cultivation within the allowed restrictions would not fall within the typical criminal act exclusion. This will be a big change from both an underwriting and claims perspective.
Home cultivation of marijuana has many inherent dangers, with a multitude of potential claims that could result. Growing marijuana plants indoors can require additional heat, water, and electricity. Electrical modifications and overloaded circuits can increase the risk of fire, while improper ventilation and irrigation can increase the risk of water damage and mould. Marijuana also grows faster when the amount of carbon dioxide increases, which is why many grow-ops have been found to use natural gas, propane, and other fuels to power carbon dioxide generators, which would dramatically increase the risk of fire.
Insurers will need to consider a requirement for insureds, or potential insureds, to disclose whether or not they are cultivating their own marijuana. Insurers currently do not typically ask applicants for insurance whether they are actively growing marijuana within their home. Whether or not someone is cultivating marijuana at home is likely to impact the premium that is charged. As a result, a failure to disclose cultivation could represent a material change in risk, as was argued by the insurer in Bahniwal v. The Mutual Fire Insurance Company.
The insurer in the Bahniwal case was unsuccessful in proving that the insureds had knowledge of the grow-op on their property. The Court confirmed that if the insureds had been aware of the presence of the grow-op on their premises, their failure to disclose its existence would have constituted a failure to disclose a material fact. As a result, insurers should consider their policy wording carefully, and determine whether or not such a disclosure should be included in their standard application process.
An additional risk related to marijuana cultivation is presented when it comes to rental properties. Insureds as landlords may have no idea if their rental property is being used to cultivate marijuana plants. Insurers should consider whether or not questions posed on an insurance application for a rental property will require landlords to demonstrate that they have taken measures to inform themselves of the legal marijuana cultivation activities of their tenants. This could require landlords to show the insurer that they have included disclosure of marijuana cultivation as a question, or series of questions, on their lease/tenancy agreement to be completed by all prospective tenants.
All of these additional risks could be heightened when looked at in the context of multi-unit housing complexes, such as large apartment and condominium complexes. The additional risk to adjoining or neighbouring properties could be significant, with the potential for a rise in claims framed as nuisance/escape to land. There is the obvious risk of flooding, fire, and mould that could impact adjoining properties. In addition, there is the potential for nuisance claims as a result of escaping odours.
Insurers are expected to recognize the increased risk of claims, where homeowners cultivate marijuana within their residential premises, by reflecting this with increased premiums. Insurers must adjust their policy application process and develop a methodology for evaluating these increased risks. This might take some time as claims arise and new policies are issued/renewed after legalization.
Insurers must also consider that although possession and home cultivation are now legal in Canada, there are limits to both. As noted earlier, almost all standard homeowner insurance policies currently include criminal activity exclusions. As a result, if a homeowner is cultivating marijuana and selling it themselves illegally (including edibles), or exceeding the limits imposed by the Act, insurers might be able to exclude, fight, or void coverage on the basis of the criminal activity exclusion. That said, losses and/or claims arising from marijuana activity that fall within the legalization limits will not be excluded.
If an insured homeowner is legally growing marijuana, it is not unreasonable to believe that the home is likely subject to an increased risk of theft as a result.
An increase in claims related to theft or damage to marijuana plants also presents an additional risk for insurers as private homeowners could become a lucrative target for thieves. Will policies allow homeowners to recover the cost of damaged marijuana plants? How will the value of the plants be determined? And, will marijuana plants be considered to be personal property for theft or damage claims, or will they fall under the “tree, shrub, and plant” portion of the policy (which typically has maximum recoverable amounts)? To ensure the smooth and efficient processing of claims, insurers are best advised to clarify the policy wording and set up a framework for adjusters faced with such claims.
Although there is a limited judicial commentary on the treatment of recreational marijuana in the context of homeowners insurance policies, the Ontario Divisional Court addressed the issue of medical marijuana in Stewart v TD General Insurance Co. The plaintiff had Health Canada’s permission to possess and cultivate his own marijuana for medicinal purposes. Eleven of his marijuana plants were subsequently stolen, and the plaintiff took the position that the plants were personal property.
The insurer in Stewart took the position that the plants were not personal property, but conceded that they were covered under the “extended coverage” clause for “landscaping”, and that it had already paid to the plaintiff the limited coverage of $1,000 per plant. The plaintiff claimed that the value of the plants was just under $50,000. The Divisional Court held that a loss due to the theft of the marijuana plants from the plaintiff’s home was excluded under the policy. The Court also noted that the standard grow-op exclusion did not apply because the plaintiff had Health Canada’s authorization to possess and cultivate the marijuana.
In reaching their conclusion, the Court in Stewart held that marijuana plants in a backyard could be considered personal property. The Court also noted that covered personal property under the subject policy must be “usual to the ownership of the maintenance of a dwelling”. As a result, the policy wording operated to exclude the marijuana plants from coverage as they could not be considered usual to the ownership and maintenance of a dwelling.
In coming to its conclusion, the Divisional Court in Stewart stated that fewer than one-third of one per cent of the population of Canada was authorized to grow marijuana for their own medicinal purposes at the material times relevant to the action (the losses occurred in 2009 and 2011). It used this information to reach its conclusion that marijuana plants in a backyard are not “usual to” the ownership or maintenance of a dwelling itself. Given the expected growth in the home cultivation of marijuana, now that the Act has come into effect, one can expect that such a judicial interpretation could be quite different in the context of legalized marijuana.
Insurers should also be prepared for a possible increase in social-host liability type claims as they relate to marijuana. As Canadians are now able to share up to 30 grams of dried marijuana with other adults, insurers should be prepared for personal injury claims resulting from situations where a homeowner supplies guests with marijuana, whether cultivated at home or not.
What if a homeowner supplies tainted or “defective” marijuana to a guest who then drives high and causes an accident? What if a child visiting a home consumes and reacts to the homeowner’s home-grown marijuana? Not only is there the potential for social-host liability claims, but there is also likely to be product liability type claims where a homeowner’s guest ingests marijuana cultivated by the homeowner.
The legalization of marijuana will result in additional risks and opportunities for the insurance industry. Insurers and their counsel must adapt to the changes that will be brought about by the Act, including undertaking an analysis of the current insurance policy exclusions and prohibitions. There will also likely be a need for changes to the policy application process, to reflect the increased risk posed by at-home marijuana cultivation.
From a claims perspective, the expected growth in the number of homeowners cultivating their own marijuana will require insurers to develop an appropriate framework to ensure that claims are being adjusted effectively.
Given that premiums are impacted by claims experience, compiling data on marijuana-related claims will be critical from an underwriting perspective so that premiums can appropriately reflect the risk posed by the legalization of marijuana.
Under the new legislation, marijuana cultivation within the allowed restrictions would not fall within the typical criminal act exclusion. Policies will need to be amended accordingly.
Personal cultivation of marijuana represents an increased risk of direct or indirect damage to property. Consideration should be given to amending standard policy applications to require disclosure of marijuana cultivation at the time of application and at renewal.
It may take some time for insurers to develop a standard method for the evaluation of the additional risk presented by the home cultivation of marijuana that can be applied somewhat consistently. Insurers should develop a framework to adjust marijuana claims and implement a system to track and evaluate such claims so that they turn the challenges faced by the legalization of marijuana into a profitable opportunity.
 Stewart v. TD General Insurance Company, 2014 ONSC 854 (hereinafter “Stewart”).