Cannabis Production: A New Type of Material Risk for Property Insurance Coverage

With the enactment of the Cannabis Act and its regulations, Canadians are now able to grow cannabis on personal property, for medical, recreational or commercial reasons. The recently issued decision of Schellenberg v Wawanesa Mutual Insurance Company, 2019 BCSC 196 (“Schellenberg) highlights an important consideration for all new and existing cannabis producers.

In Schellenberg, on January 21, 2014, a fire damaged an outbuilding on the plaintiff’s property which contained a medical marijuana grow-operation licensed by Health Canada. Before that, in 2011 or 2012, Mr. Schellenberg, a longtime builder, finished the outbuilding along with an upgrade to the property’s electrical system from 200 to 400 amps. Wawanesa had been insuring the property for many years and the Schellenbergs renewed their policy each year through Hub International insurance brokers. The Schellenbergs acknowledge they did not notify Hub or Wawanesa of the grow operation or the upgrade to the electrical system before the fire. After the fire, Wawanesa denied coverage and voided the policy based on a failure to disclose a material change to the risk.

The plaintiff sued their insurer, Wawanesa and the broker Hub International.

Issues

Wawanesa argued that the plaintiff failed to notify them when they performed upgrades to their outbuilding to accommodate a cannabis grow-op and higher electricity usage. Since the insurance policy extended only to the previous state of the outbuilding, and the addition of the cannabis grow-op substantially altered the risk contemplated, coverage was denied.

However, the plaintiff alleged that Wawanesa wrongfully voided coverage, that they breached an implied contract to ensure adequate coverage was present, and that their broker was negligent for failing to ask questions relating to the changes in risk to the building.

Decision

In the end, the Court decided for Wawanesa and Hub finding that Hub was not negligent for not inquiring more about the building’s changes. The Court also held that there was no breach of contract. There was insufficient evidence that there was an alleged agreement to provide adequate coverage despite receiving incomplete information. In other words, insurers are not required to determine whether a cannabis grow-op is present after property changes are made, particularly when little information suggesting its presence is provided.

Finally, of note is the Court’s holding that setting up a cannabis grow-op and performing an electrical system upgrade in an insured building was considered a material change in risk. As such, property insurers must be informed of these changes. Given the scale of the operation, at more than 300 cannabis plants and accompanying space and electricity requirements, the plaintiff ought to have considered that the changes would affect their insurance premiums.

Implications

This case acts as a reminder for future and current cannabis producers to inform their insurers of any changes to the use of their property. A sizeable operation to grow cannabis requiring upgrades to electricity systems may be deemed a material change in risk, which may void an insurance policy if an insurer is not notified.

For more information about this case, please contact Michael Nadeau from our Insurance Practice Group, who successfully represented Hub International.