Marijuana Statute Raises Questions about Condo Insurance Coverage and Employment Rules

Published on: March 24, 2017

By Edmund Allcock

Proponents of the new state law permitting recreational use of marijuana, and the voters who approved it, viewed the measure as a long overdue move to put marijuana in the same category as alcoholic beverages ─ no more or less harmful and no more or less subject to abuse than beer and wine. Voting ‘yes’ for marijuana was relatively easy; dealing with the avalanche of legal, political and administrative questions the law has triggered is far more difficult.

Condominium associations are struggling already with its unanticipated complexities. Most have focused primarily on whether the law requires associations to allow owners to smoke in their units (it does not) and how or if to regulate marijuana use in their communities. These questions are important, but relatively straightforward. Several other equally important and far more complicated questions have received considerably less attention. I’m concerned about two issues in particular: Insurance coverage and employment practices.

Will Insurance Cover Marijuana-related Damage?

Concerns about insurance coverage are not academic. They arise from the very real risks created by growing marijuana in enclosed spaces. State law allows residents to grow up to 12 marijuana plants in their homes, which certainly sounds harmless enough. But there are big differences between potted plants, which require varying amounts of water and light, and planted pot, which requires a lot of water, heat lamps and other equipment to generate the heat and humidity required for growth. Water and humidity increase mold risks; heat and electricity increase the potential for fires, and it is not at all clear that standard insurance policies would cover the resulting damage.

Insurance policies cover damage from accidental events, but they typically exclude coverage for “illegal acts” and they require notice of known hazards. Although marijuana possession and use are still illegal under federal law, state laws govern insurance and growing marijuana would not be illegal under state law. But growing more than the maximum of 12 plants the law allows would be an “illegal act,” and an insurer might decline coverage for a damage claim as a result.

The hazard notice requirement may provide cause for even more concern. In one of the few court cases to consider a marijuana-related insurance question (Nationwide Mutual Fire Insurance Company v. McDermott), the U.S. District Court for the Eastern District of Michigan ruled that the insurer properly declined coverage for a fire caused by a homeowner who was trying to manufacture marijuana oil. The court emphasized two points: The owner’s use of butane was a hazard the owner had failed to disclose; and because butane is inherently and obviously dangerous, the resulting fire was not accidental and was thus subject to the exclusion for intentional acts.

Coverage for any claim depends on the wording of the insurance policy and (if disputed) how it is interpreted by the courts. Insurers haven’t yet focused much on the risks related to marijuana, but there are indications that they are beginning to do so. One California insurer has added this clause to policies for rental properties:

“[We] do not insure for loss caused directly or indirectly by any of the following . . . illegal growing of plants or the illegal raising or keeping of animals….Such loss is excluded whether by vandalism or any other cause and whether or not within the knowledge or control of an insured….”

Notice Requirements

In the McDermott case, the court ruled that the owner producing marijuana oil was responsible for complying with the hazard notice requirement. Will insurers require associations to provide notice if owners are growing marijuana in their units? Will they also decide associations have an affirmative obligation to determine if owners are growing marijuana and decline coverage if an association fails to discover and provide notice of this potentially “hazardous” activity?

I don’t know how insurers will answer those questions. But the risks that associations may lose coverage or end up in a prolonged legal battle to secure it are great enough to lead me to advise association clients to prohibit owners from growing marijuana. Because this ban would affect what owners can do in their units, it could not be imposed by a board rule; it would require a bylaw amendment that a super majority of owners would have to approve.

Mixed use communities have to be concerned not only about residents growing marijuana in their units, but about businesses that may want to sell marijuana in the association’s commercial space. In addition to the obvious image considerations (Do you want a pot shop selling marijuana on the ground floor of your luxury condominium?) retail sale of marijuana creates a variety of potential risks — fire and water damage if the business grows marijuana on site, plus security concerns ─ marijuana is largely a cash business, making retail outlets prime targets for thieves.

Insurance coverage for damage caused by these retail operations is an open question, as it is for marijuana-related claims in residential communities. The uncertainty of coverage plus the heightened security risks for residents argue strongly against allowing retail marijuana sales in condominium communities.

Can You Fire Employees Who Use Marijuana?

This question is getting more attention as more states approve legislation authorizing recreational use of marijuana. Most of these statutes carve out an exemption for employers. The Massachusetts law states: “This chapter shall not require an employer to permit or accommodate conduct otherwise allowed by this chapter in the workplace and shall not affect the authority of employers to enact and enforce workplace policies restricting the consumption of marijuana by employees.” The courts are sorting out precisely how exclusions such as this apply to workplace policies.

The Massachusetts Supreme Judicial Court (SJC) is considering a case now in which a company fired an employee who tested positively for marijuana she was using to treat a medical condition. The plaintiff (Barbuto) argues that firing her for using a legal drug violates state anti-discrimination laws and undercuts the purpose of the state’s medical marijuana law, permitting the use of the drug to treat medical conditions. The employer, supported by amicus briefs from business groups, contends that regardless of what state law allows, businesses have the right to maintain a drug-free workplace.
The courts that have considered the issue thus far have sided with employers. One widely cited decision by the Colorado Supreme Court held that a state law prohibiting employers from firing workers for off-duty behavior legal under state law did not apply, because marijuana is still illegal under federal law.

State vs. Federal Laws

It is impossible to predict how the Massachusetts SJC will rule on the medical marijuana question in the case before it, and whether the decision will distinguish between medical marijuana, which is necessary, and recreational marijuana, which is not. But there is no question that the clash between federal and state laws highlighted in the Colorado decision is complicating efforts in Massachusetts and elsewhere to implement recreational use laws.

The Obama Administration dealt with the conflict largely by declining to enforce the federal ban in states that have enacted laws allowing medical or recreational use of the drug. The Trump Administration has signaled a more aggressive policy. “States can pass the laws they choose,” Attorney General Jeff Sessions said recently. “I would just say it does remain a violation of federal law to distribute marijuana throughout any place in the United States, whether a state legalizes it or not.”

As Massachusetts officials develop regulations governing recreational marijuana — including licensing requirements for large-scale grow operations and for retail outlets selling the drug ─ state Treasurer Deb Goldberg is asking the Department of Justice to clarify its enforcement plans. “Effective implementation requires a significant investment in staff, equipment and technology,” she noted in a letter to Sessions. “As State Treasurer, I am keenly aware of my obligation to manage the state’s finances prudently,” she added. “Fiscal responsibility requires predictability, and I want to ensure that we fully understand the DOJ’s intentions.”

Regardless of how the DOJ responds, it is safe to assume that state officials will find a way to implement the recreational use law ─ not so much because of a principled belief that the drug should be legal, but because of the revenue taxing it will bring to the state. The law isn’t called “A Statute Authorizing Recreational Use of Marijuana”; it’s called “The Regulation and Taxation of Marijuana Act.”

The non-profit Tax Foundation estimates that a mature, legalized marijuana industry would generate up to $28 billion in tax revenue annually for federal, state and local governments. Colorado alone collected $70 million in taxes in 2015.

Massachusetts officials, who initially anticipated taxing marijuana sales at 12 percent, are now reportedly eyeing a rate as high as 30 percent, with licenses costing an estimated $15,000. As they develop regulations for what will be a multi-billion-dollar industry, state officials will be primarily concerned about maximizing the revenue from legalized marijuana. Condo associations concerned about the adverse impacts on their communities will have to protect themselves.

Edmund Allcock