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Barbara Tracy v. Usaa Casualty Insurance ) Company

March 16, 2012


The opinion of the court was delivered by: Leslie E. Kobayashi United States District Judge


Before the Court is Defendant USAA Casualty Insurance Company's ("Defendant") Motion for Summary Judgment ("Motion"), filed on October 20, 2011. Plaintiff Barbara Tracy ("Plaintiff") filed her memorandum in opposition on January 10, 2012, and Defendant filed its reply on January 13, 2012. This matter came on for hearing on January 30, 2012. Appearing on behalf of Defendant was Ward Fujimoto, Esq., and appearing on behalf of Plaintiff was Ivan Van Leer, Esq. Plaintiff filed her Supplemental Declaration in Opposition ("Plaintiff's Supplemental Declaration") on February 6, 2012, and Defendant filed its Supplemental Reply Memorandum in Support of Its Motion for Summary Judgment [ECF No. 13] ("Supplemental Reply") on February 9, 2012. After careful consideration of the Motion, supporting and opposing documents, and the arguments of counsel, Defendant's Motion is HEREBY GRANTED because the cultivation of marijuana, even for the State-authorized medical use, violates federal law and the enforcement of an insurance policy under the particular circumstances of this case is contrary to public policy, as set forth more fully below.


Plaintiff filed the instant action in the Circuit Court of the Third Circuit, State of Hawai`i, on July 11, 2011. Defendant removed the action on August 10, 2011, based on diversity jurisdiction.

Plaintiff's Complaint alleges that Defendant breached the parties' insurance coverage contract by failing to pay Plaintiff's insurance claims for stolen property. Plaintiff, who owns and resides at a property in the Puna District of the State and County of Hawai`i, purchased a homeowners insurance policy from Defendant ("the Policy") on May 18, 2010. [Complaint at ¶¶ 1, 5.] On or about July 30, 2010, twelve plants were stolen from Plaintiff's property. Nine of the twelve plants were fully matured cannabis sativa, commonly known as marijuana plants. The remaining three plants were less mature plants. [Id. at ¶ 7.] Plaintiff states that she "lawfully possessed, grew, nurtured and cultivated the plants consistent with the laws of the State of Hawaii . . . permitt[ing] individuals to possess and grow marijuana for medical purposes[.]" [Id. at ¶ 12(b).*fn1]

Plaintiff asserts that she is entitled to coverage under the Policy for the loss of these plants because the Policy includes coverage for loss to "'trees, shrubs, and other plants.'" [Id. at ¶ 8 (quoting Policy, Replacement Cost Coverage

- Personal Property HO-728 (08-97) at ¶ 3).] Plaintiff alleges that she notified Defendant of the loss of the twelve plants, presenting a claim of $4,000 for each mature plant and $3,200 for each of the less mature plants, for a total of $45,600. [Id. at ¶¶ 9-10.] Defendant initially agreed to pay Plaintiff's claim and issued a payment to Plaintiff for the loss, but Plaintiff claimed that the amount was insufficient. [Id. at ¶ 12(e).]

Plaintiff alleges that, on or about May 27, 2011, Defendant notified Plaintiff that it would not make any further payment for the loss because Plaintiff did not have an insurable interest in the plants, which could not be lawfully replaced. Plaintiff argues that Defendant could have inspected Plaintiff's property at any time during the Policy period, and Defendant had notice that Hawai`i law permits individuals such as Plaintiff to lawfully grow marijuana for medical purposes. [Id. at ¶¶ 11-12(c).] Plaintiff alleges that the Policy specifically allows for coverage of irreplaceable "plants", without excluding any particular type of plant, with payment in the form of actual cash value. She alleges that insurers regularly pay for such claims. [Id. at ¶¶ 12(d)-(e).]

Although not clearly enumerated in the Complaint, Plaintiff's claims appears to be as follows: breached the insurance contract; unreasonable/bad faith denial of her insurance claim; and a violation of Haw. Rev. Stat. Chap. 480. Plaintiff seeks: the fair and reasonable value of the stolen plants; contract and Chapter 480 damages; reasonable attorneys' fees and court costs; and interest. [Id. at pgs. 4-5.]

I. Motion for Summary Judgment

In the instant Motion, Defendant argues that it is entitled to judgment as a matter of law because Plaintiff lacks an insurable interest in the marijuana plants under State and Federal law, and therefore Defendant is not obligated to provide coverage under the Policy.

First, in order to have an insurable interest, the insured's interest in the property must be "lawful" property under Hawai`i Revised Statutes § 431:10E-101. Second, Hawai`i law generally prohibits the enforcement of illegal contracts, and Plaintiff cannot insure her marijuana plants unless her possession was legal. [Mem. in Supp. of Motion at 3 (citing Haw. Rev. Stat. § 1-5).] Third, Defendant argues that Hawaii's medical marijuana law, Haw. Rev. Stat. § 329-125, does not create an insurable interest because it merely "provides an affirmative defense to marijuana-related state law crimes for the medical use of marijuana." [Id. at 4 (emphasis omitted).] Defendant argues that there is no affirmative defense for the promotion, purchase, or sale of marijuana, even for medical use, and therefore Plaintiff cannot legally use the insurance proceeds to purchase replacement marijuana plants. Further, Haw. Rev. Stat. § 329-124 expressly disclaims insurance coverage for medical marijuana. [Id. at 4-5.]

Defendant points out that the statutory law in force and effect at the time an insurance policy is issued becomes part of the insurance contract, as though it were expressly written into the contract. Further, courts should not interpret insurance contracts to provide coverage when coverage would be against public policy, such as when an insured's activities relate to an illegal controlled substance. [Id. at 5-6.]

Defendant contends that requiring insurance coverage for marijuana plants would be against federal public policy because coverage presupposes that the insured will purchase, sell, and/or distribute marijuana plants with insurance proceeds. Defendant emphasizes that in Gonzales v. Raich, 545 U.S. 2195 (2005), the United States Supreme Court held that distributing, possessing, and using marijuana, even for medical purposes, are illegal under federal law with the sole exception of federally-approved research. [Id. at 10.] Defendant acknowledges that "[w]hile the Gonzales Court did not specifically hold that federal prohibitions on marijuana preempts contrary state medical marijuana laws, a growing number of other courts have applied Gonzales and/or the Supremacy Clause, and have so held." [Id. at 12.] Defendant argues that Hawaii's medical marijuana laws do not purport to legalize medical use and do not require insurance coverage for medical use. Even if Hawai`i law required insurance coverage for medical marijuana use, such coverage would conflict with, and therefore be preempted by, federal law prohibiting such use. [Id. at 15.]

Defendant argues that, at a minimum, it is entitled to summary judgment on Plaintiff's extra-contractual claims for unreasonableness/bad faith and Plaintiff's Chapter 480 claim. Defendant argues that Plaintiff did not produce any evidence of Defendant's bad faith, and Plaintiff failed to meet her burden of showing that Defendant unreasonably denied her claim. Defendant argues that, where an insurance company denies a claim based on a correct interpretation of the law, there can be no unreasonable denial of insurance coverage. Even if there is a dispute over the validity of Plaintiff's claim, the dispute demonstrates that Defendant reasonably disagreed with Plaintiff's claim based on an unresolved legal issue. [Id. at 15-17.]

Defendant further argues that Haw. Rev. Stat. Chapter 431, Article 13 preempts Haw. Rev. Stat. Chapter 480 in the area of insurance. Defendant contends that Chapter 480 does not apply because an insurance beneficiary is not a "consumer", and an insurance policy does not involve "goods" or "services". [Id. at 17-18.] Defendant emphasizes that Haw. Rev. Stat. § 480-11(b) expressly exempts insurance companies from the scope of Chapter 480. Defendant also argues that Chapter 480 should not apply to the insurance claims in this case because of Haw. Rev. Stat. § 329-124, which states that Hawaii's medical marijuana laws do not require insurance coverage for the medical use of marijuana. [Id. at 20-21.]

Even if Chapter 480 applies, Defendant argues that there is no evidence to support Plaintiff's claim that the denial of her insurance claim constituted a violation of Chapter 480. At a minimum, the denial was supported by a reasonable legal argument. There is nothing to support Plaintiff's conclusory allegation that Defendant violated Chapter 480, and Defendant contends that it is entitled to summary judgment on Plaintiff's Chapter 480 claim. [Id. at 21-23.]

Defendant also argues that it is entitled to summary judgment on the issue of Plaintiff's entitlement to punitive damages. Under Hawai`i law, the issue of punitive damages cannot be submitted to the jury based upon evidence of merely a possible breach of contract or mere inadvertence, mistake, or errors of judgment. Defendant emphasizes that Hawai`i law requires more than just the commission of a tort; clear and convincing evidence of wanton, oppressive, malicious, or wilful conduct is required. Defendant contends that, because it had at least a reasonable legal basis to deny Plaintiff's claim, Plaintiff cannot establish any conduct that would warrant punitive damages. [Id. at 23-26.]

III. Plaintiff's Memorandum in Opposition

In her Memorandum in Opposition, Plaintiff states that the facts of this case are essentially uncontested. She emphasizes that the Policy expressly covers losses to "'Trees, Shrubs and Other Plants'" caused by, inter alia, theft. [Mem. in Opp. at 1-2 (quoting Policy at 3-4).]

Plaintiff argues that Defendant is a sophisticated and experienced insurance company that likely provided similar services in Hawai`i for many years prior to the events at issue in this case. Plaintiff contends that the Policy, which Defendant prepared, specifically contemplated the coverage of marijuana plants, and Defendant was aware of both the federal law and Hawai`i law relevant to this issue when it issued the Policy. [Id. at 2-3.] Plaintiff states that paragraph J on page 13 of the Policy excludes coverage for losses involving illegal narcotics, including cocaine, LSD, and marijuana, but the Policy expressly states that the exclusion "'does not apply to the legitimate use of prescription drugs by a person following the orders of a licensed physician.'" [Id. at 3 (emphasis omitted).]

Plaintiff points out that Haw. Admin. R. § 23-202-13(b)(1) provides that an individual who qualifies for medical marijuana use may supply herself by growing the plant at her home address. Plaintiff argues that there is no basis for Defendant to deny coverage because Defendant was on notice that, by covering "trees, shrubs or plants", it was required to cover marijuana/cannabis plants where the insured was a licensed medical marijuana user. The contract terms are not ambiguous and must be interpreted according to their plain meaning. Further, Hawai`i courts honor the objectively reasonable expectations of the parties concerning insurance coverage, and the objectively reasonable expectations are construed from a layperson's perspective. Plaintiff emphasizes that Defendant initially acknowledged coverage and paid $8,801.90 on Plaintiff's claim in February 2011. Defendant only raised its objections after Plaintiff sought more money on May 27, 2011. [Id. at 3-4.]

Plaintiff argues that she had an insurable interest in the plants, as defined by § 431:10E-101, because she is permitted by Hawai`i law to have the plants for medical use. She contends that, by enacting Haw. Rev. Stat. § 329-127, which governs the return of marijuana an other paraphernalia after seizure, the State Legislature acknowledged that a medical marijuana user has a substantive interest in the source of her medical marijuana. Where the government seizes the plants, they must be returned to the owner upon a showing that the owner was in compliance with the medical marijuana statute. Plaintiff emphasizes that courts widely hold that an "insurable interest" need not be a free and unencumbered interest. [Id. at 5.]

Plaintiff argues that Defendant's reliance on Haw. Rev. Stat. § 329-124 is misplaced because the statute only addresses medical insurance coverage for marijuana use. As to the bad faith claim, Plaintiff argues that her allegations are sufficient because a plaintiff can establish a bad faith claim by proving that the insurer unreasonably handled claims, denied claims, or interpreted its policies. Plaintiff contends that this issue is fact specific and is not appropriate for summary judgment. [Id. at 6-7.]

IV. Defendant's Reply

In its Reply, Defendant emphasizes that Plaintiff does not contest that an insured must have an "insurable interest" in property to insure it, or that marijuana, even when used for medical purposes, is a Scheduled I controlled substance under 21 U.S.C. §§ 841(a) and 812(c). Plaintiff has not cited any authority for the proposition that medical marijuana is legally insurable, nor has she responded to Defendant's argument that a contract insuring marijuana would be inconsistent with public policy under federal law. Defendant also reiterates that § 329-125 merely provides an affirmative defense for the use of medical marijuana; neither it nor any other statute provides a similar defense for the promotion, purchase, or sale of marijuana. Thus, medical marijuana plants cannot be insured because purchasing replacement plants with insurance proceeds would be illegal. Defendant also points out that nothing in § 329-124 limits the provision to health insurance. Thus, pursuant to § 329-124, Defendant is not required under Hawai`i law to provide insurance for medical marijuana. [Reply at 3-5.]

Defendant argues that the general view precludes insurance coverage of a controlled substance or an insured's activities relating to that substance. Plaintiff has not cited any contrary law. Thus, even if medical marijuana was insurable under Hawai`i law, such insurance would be ...

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