Cannabis – Home Insurance in the age of Legalization

1. Cannabis – Home Insurance in the age of Legalization On October 17, 2018, Canada became just the second country, and the first Western nation, to legalize recreational cannabis. This has implications for Insurers – in particular those underwriting Home Insurance.

2. The Cannabis Act - Briefly • Bill C-45, also known as the Cannabis Act, allows Canadian adults to legally possess and cultivate cannabis for recreational purposes. • The Act limits possession to 30g of dried cannabis, while in a public place. There is no limit on private possession, however. Cultivation is limited to four cannabis plants per dwelling house. • No taking your plants for a walk in a “public place” - if they are flowering or budding?!

3. Medical users are not subject to the 4 plant cultivation limit and can possess the lesser of (a) a 30-day supply, or (b) 150 grams of dried cannabis or the equivalent amount in another form. • ISSUES RELEVANT TO INSURERS • A. Increased Risks with Marijuana • (i) Property Damage with Home Cultivation

4. Inherent risks: Water damage; Mold; Fire; Vandalism; Burglary; Increased CO2; Toxic chemicals: pesticides and fertilizers.

5. The level of risk depends heavily on the mode of cultivation. A single potted plant on a windowsill may not, but a fully functioning hydroponic growing operation presents all of the risks listed above. Biggest risks are associated with modifications to electrical systems and mold.

6. Modifications to electrical systems and overloaded circuits increase the risk of fire, increased humidity = mold that is practically impossible to remove in some circumstances. • (ii) Damage and Theft Claims • With legalization, cannabis within the prescribed legal limits, is now insurable. • 30 gram possession limit only applies when one is in public. No limit on how much dried cannabis a person can have in their home, provided legal source.

7. The potential to store large amounts of dried cannabis in a dwelling house could lead to an increase in both the number and value of theft and damage claims. • If policy has sub-limits or additional coverage for trees, plants and shrubs, the insurer’s exposure could be significantly limited in the event of damage or theft, or it may not apply if an indoor grown plant. • Possession and indoor cultivation = break-ins and home invasion, which could lead to personal injury claims.

8. Beware of the risks! • In Allard v. Canada, 2016 FC 236, the Federal Court heard evidence from RCMP’s Coordinated Marijuana Enforcement Team: • Residential marijuana growing operations, whether legal or illicit, are at risk of home invasions and theft because of the monetary value of marijuana. There have been instances where “grow rips” have resulted in serious injuries to the occupants of the residence.” • (iii) Third Party Liability – Social Host Liability • Beyond alcohol: a new method of impairment may lead to increased exposure to social host liability claims.

9. Unlike alcohol, edible cannabis could result in accidental ingestion by children. • B. Errors and Omissions and Material Change in Risk • Legalization means that insurers and brokers must now ask their customers specific questions about possession and cultivation of cannabis. Brokers need to ask insureds about cannabis possession and cultivation in order to avoid errors and omissions exposure; issues arising with the valuation of property that exceeds policy sub-limits in the event of a loss.

10. The cultivation of cannabis should be seen as a material change in risk. However, if questions about cannabis cultivation are not canvassed at the time of application and renewal, the Courts may reject the argument that the change in risk was of material importance to the insurer. • In Aviva Insurance Company of Canada v. Thomas, 2011 NBCA 96 at para. 44, “where an insurer fails to ask about a matter, the court may draw an inference that • the insurer does not consider • the Matter relevant”.

11. Insurers should clearly communicate to the insured during the application and renewal process that they consider cannabis cultivation (and storage) a material change in the risk and the potential consequences of same. • C. Exclusions – An Evolving Landscape • Under Canada’s new legalization regime, exclusions for property illegally acquired or kept will no longer apply to legally acquired and or cultivated cannabis. • Other Exclusions?

12. We do not insure loss of or damage to lawns, outdoor trees, shrubs or plants except as provided under Additional Coverages of this policy. • Insurers would be wise to review such exclusions to ensure that the wording covers indoor cannabis plants as well. The value of some cannabis plants can be considerable • Further, legal home cultivation also reintroduces a peril that is currently excluded under standard home insurance policies. A typical home insurance policy excludes losses arising from an insured’s criminal acts. More than four plants is a breach of the Cannabis Act though.

13. There are long-standing policy wordings that specifically target cannabis growing operations: • We do not insure loss or damage to buildings and/or structures, and their contents, used in whole or in part for the cultivation, harvesting, processing, manufacture, distribution or sale of marijuana or any product derived from, or containing, marijuana or any other substance falling within the Schedules of the Controlled Drugs and Substances Act, whether or not the insured is aware of such use of the property. • This clause is obsolete now.

14. Insurers will need to revisit these clauses. Some insurers have included the phrase “except as allowed by law” at the end of the exclusion. This protects insurers from losses with respect to illegal grow operations, while still serving the marketplace of consumers wishing to lawfully cultivate cannabis.

15. D. Conclusion

16. Writing risks in Canada has a new wrinkle. • The legalization of cannabis and its impact on the insurance industry is uncharted territory. • The biggest concern is that the steps previously taken to guard against the risks associated with illegal grow-ops, will now have to adapt to the legalization of cannabis with new policy wordings.

17. Insurers who take a proactive approach to home insurance under the new legalization regime will be able to insulate themselves from cannabis-related losses and benefit from their own version of the “Green Rush”.