Contractual Risk-Transfer Provisions, Insurance Offer Potential Relief to Cannabis-Related Businesses Affected by Recent California Heat Wave

The recent heat wave affecting California – perhaps the worst in the state’s history — has taken a toll on the cannabis industry. Forced to deal with “power outages and other daily disruptions stemming from excessive heat and a taxed power grid,” cannabis-related businesses may now – with the heat wave reportedly “over” – find some relief in their commercial contracts and/or insurance policies.

According to a recent story published by MJBizDaily, “[a] nearly two-week heat wave punctuated the end of another challenging summer for California marijuana businesses.” “Brownouts” reportedly affected the industry, requiring, for example, growers to reduce power consumption and to obtain and utilize back-up generators. Extraction companies shut down production “to protect temperature-sensitive extraction equipment and maintain product quality standards.”

In fact, also according to MJBizDaily, “[t]he state’s Department of Cannabis Control even took the rare step of asking legal marijuana businesses to voluntarily shut off lights and major power sources and use backup generators amid the excessive heat warnings.”

In addition to power outages and related disruptions, cannabis-related businesses reportedly “delayed harvesting and staggered work shifts as emergency measures kicked in ….” Crops and machinery may also have been affected.

Outages and other disruptions, obviously, have a significant economic impact on businesses. MJBizDaily shared the story of one California greenhouse that likely incurred in excess of $30,000 in “unplanned monthly expense[s]” resulting from the recent heat wave. That one business, of course, is not alone.

In search of some economic relief, affected businesses should at least review their various commercial contracts as well as their insurance policies – specifically, those policies providing property and/or business-interruption coverages. While there is no guarantee that any risk-transfer provision in any contract will allow an affected business to somehow offset a particular loss, or that insurance will cover a particular loss, it would seem well worth the business taking the time to at least review its contracts and its insurance policies to determine whether they can offer any help.

Contracts may contain a variety of provisions that could potentially provide a cannabis-related business some economic relief. For example, a force majeure clause could address who bears the risks of “an act of God.” “The primary purpose of force majeure,” one federal district court explained, is to ”relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.” Today, some contracts may even specifically identify “blackouts” as “force majeure events” and explicitly detail what happens – for example, performance is excused – when one occurs.

Commercial contracts may also include other provisions – including indemnification, releases, waivers, and limitations of liability/damages provisions – that may be implicated by the recent heat wave and its effects. If nothing else, such provisions may dictate what damages (if any) are (or are not) recoverable for a business’ failure to perform and/or who is responsible for paying them.

Insurance also may offer some relief. The “business interruption” or “business income” coverage part of a commercial property (or potentially other) insurance policy may provide coverage, for example, for “the actual loss of Business Income … sustain[ed] due to the necessary ‘suspension’ of … ‘operations’ during the ‘period of restoration’” and/or the “Extra Expense” required “to continue operations” – assuming generally there was “direct physical loss of or damage to Covered Property.”

While insurance companies may deny that a blackout or brownout, for example, caused direct physical loss or of damage to property, policyholders should not just give up. In a case involving food that spoiled because of a four-day blackout, the Superior Court of New Jersey, Appellate Division, considered whether a supermarket was entitled to coverage for its losses pursuant to an extension to “a first-party, all-risk insurance policy” that provided coverage “for consequential loss or damage resulting from interruption of … power … if the interruption results … [f]rom physical damage by a peril insured against … [a]way from a covered location.”

In Wakefern Food Corporation v. Liberty Mutual Fire Insurance Company, 968 A.2d 724 (N.J. Sup, Ct. App. Div. 2009), the Court “conclude[d] that the undefined term ‘physical damage’ was ambiguous and that the trial court construed the term too narrowly, in a manner favoring the insurer and inconsistent with the reasonable expectations of the insured.” The court further opined: “In the context of this case, the electrical grid was ‘physically damaged’ because, due to a physical incident or series of incidents, the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity” (footnote omitted).

As in Wakefern Food, additional coverage, such as “utility service interruption” coverage, may also be implicated. The International Risk Management Institute, Inc. (“IRMI”) describes “Utility Service Interruption Coverage” as “coverage for loss due to lack of incoming electricity caused by damage from a covered cause (such as a fire or windstorm) to property away from the insured’s premises – usually the utility generating station.” The IRMI, however, cautions that this coverage – also known as “off-premises power coverage” – generally is “[n]ot provided in a standard property insurance policy but [is] available by endorsement.” It also warns that “[u]tility service interruption coverage endorsements vary widely as to what utility services are included, whether both direct damage and time element loss are covered, and whether transmission lines are covered.”

An injured party’s specific and facts and circumstances, along with the specific terms of its contracts and insurance policies, ultimately will determine whether the party has the ability to transfer risk through insurance or some other mechanism. While there are no guarantees that such relief will be available, the potential for at some least some financial relief in the wake of the recent heat wave calls for a timely review of such documents.

If you have any questions about insurance, contractual risk transfer, potentially obtaining some economic relief from the recent heat wave, and/or this alert, please contact Michael H. Sampson.

Mike is a partner at Leech Tishman and co-leads the firm’s Cannabis Industry Group and is a partner in the firm’s Litigation Practice Group, where he leads the Insurance Coverage Group. He routinely advises plant-touching, non-plant-touching, and ancillary businesses about risk-mitigation, contractual risk-transfer, and insurance-coverage issues. Mike can be reached at msampson@leechtishman.com or at 412-261-1600.)

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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in business restructuring & insolvency, construction, corporate matters, employment & labor, estates & trusts, intellectual property, litigation & alternative dispute resolution, and real estate. In addition, the firm offers a wide range of legal services to clients in the aviation & aerospace, cannabis, emerging cyber technologies, energy & natural resources, healthcare, and hospitality industries. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Los Angeles, New York, Philadelphia, Sarasota, and Washington, D.C.