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Vol. 7 - Issue 7
September 26, 2018


Marijuana Deal Goes To Pot: Leads To Interesting “Wrongful Eviction” Coverage Case

The increase of legalized marijuana over the past few years has led to several decisions addressing coverage arising out of its use. [See below: If Your Coverage Was Coppertone: Coverage Opinions In August: What You May Have Missed – “Policyholders Will Shout Doobious Decision: Marijuana Coverage And An Issue I’ve Never Seen Before”]

A marijuana-related real estate deal gone bad landed a coverage case in a California federal court’s lap. Black Mountain Center v. Fidelity & Deposit Co., No. 17-1776 (S.D. Calif. July 26, 2018) involved coverage arising under the following circumstances.

Black Mountain Center owned the Haidinger Center in San Diego and leased commercial space to Victoria DuPont and Jeff Droege to operate a medical marijuana dispensary – and no other purpose. The parties agreed that the tenants could operate the marijuana dispensary upon receipt of a Conditional Use Permit (CUP). In November 2014, the tenants obtained a tentative CUP. However, it contained onerous requirements that neither party anticipated. For example, the need for Haidinger to have armed guards on the property. In addition, Haidinger was unable to obtain insurance for the complex because of the existence of a medical marijuana dispensary.

Haidinger believed that the CUP conditions materially altered the deal and concluded that it could not go forward with the project nor consent to the CUP conditions.

The San Diego Planning Commission eventually approved the CUP. However, Haidinger refused to sign it and notified the tenants that it was terminating the lease.

Not surprisingly, the tenants did not take this sitting down. Following certain demands, the tenants filed suit against Black Mountain Center, alleging that Plaintiffs denied Tenants’ quiet enjoyment of the property and breached the lease when Haidinger failed to sign the CUP. Tenants sought damages in the amount of $3,200,000.

Fidelity, Black Mountain’s insurer, denied liability coverage. Litigation ensued. The principal issue was whether coverage was owed under the “personal and advertising injury” section of the policy. Specifically, “Personal Injury means injury other than bodily injury arising out of one or more of the following acts: c. wrongful entry into premises that a person or organization occupies or wrongful eviction of a person or organization from premises that the person or organization occupies.”

The court held that, at least for duty to defend purposes, there was a wrongful eviction that satisfied the definition of “personal and advertising injury.”

The principle, at the heart of the decision, was that, under California law, a wrongful eviction extends to both actual and constructive evictions. The court also rejected the argument that “wrongful eviction” should be narrowly construed and limited to situations in which the landlord expels the tenant though the legal process.

With these principles in place, the court seemed to have little problem concluding that the “wrongful eviction” requirement had been satisfied.

“Plaintiffs assert that the record establishes that Tenants set forth sufficient facts and allegations to give rise to a constructive eviction which occurs when the landlord engages in acts that render the premises unfit for occupancy for the purpose for which it was leased, or deprive the tenant of the beneficial enjoyment of the premises.”

The court agreed: “Haidinger represented that he would execute the preliminary CUP, a prerequisite for obtaining the final CUP; Haidinger refused to sign the CUP; Tenants were unable to operate the premises as a medical marijuana dispensary; and Tenants incurred substantial expenses in reliance upon the aforementioned representations. . . . The above facts strongly suggest a constructive eviction claim potentially covered by the policy [duty to defend].”

Lesson for insurers: Take care when your insureds are leasing a joint to be used for a marijuana dispensary.


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