Insurance Committee Indicates RICO Covered by General Liability Insurance

A recent report issued by the National Cannabis Industry Association Finance and Insurance Committee (“committee”) indicates lawsuits filed under Racketeer Influenced and Corrupt Organizations Act (“RICO”) by a third party against a dispensary would be an example of a claim covered by a commercial general liability policy. 

These committees are a opportunity for members with particular expertise to volunteer and effect change. In April of 2018, the committee released their publication entitled “Protecting Your Cannabis Business: A Commercial Insurance Review” to educate the cannabis industry on types of coverages available, purpose of those coverages, and citing examples of when coverage would be offered.

Besides the RICO lawsuit, the committee cited other examples covered by general liability insurance include a customer who slips and falls, repairman bitten by a dog, and product disparagement claim brought by a competitor.

What is RICO?

RICO is a violation of United States Federal law enacted under U.S. Code Title 18 Chapter 96 of the Organized Crime Control Act of 1970.  There is a criminal and civil component to the statute.  The law specifies offenses known racketeering activities such as arson, bribery, extortion, gambling, murder, kidnapping, and dealing in a controlled substance such as marijuana that is part of ongoing criminal enterprise.

The party claiming RICO must be able to prove damages exist in addition to other important elements.  The injured party may sue in federal court and collect three times the damages they have sustained including the cost of the lawsuit.

Is a RICO Lawsuit considered Accidental?

Generally speaking, the purpose of commercial general liability policy is to offer coverage for the accidental, uncertain, and fortuitous losses to a third party.  This purpose has evolved over time, but remains a foundation to the history of insurance.  The cannabis licensee purchasing insurance is knowingly and intentionally operating a business in violation of federal law.  The RICO lawsuit will be a response by a third party due to the licensee’s conduct and does not appear accidental.   

If the cannabis licensee’s conduct is certain and intentional, then cannabis insurance carriers might deny the claim based on this fact. 

Does a RICO lawsuit meet the Definition of an Occurrence?

In our experience, the sections below from a cannabis insurance policy may provide additional insight on how a RICO claim or lawsuit would be treated from a policy perspective.

The typical insuring agreement will state the following:

Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.

There are several key terms within the insuring agreement such as “for which this insurance applies” or “to which this insurance does not apply.”  This language seems insufficient to consider if a RICO claim would or would not be covered.

The insuring agreement does provide several conditions of which one condition would be noteworthy in our opinion as it pertains to this type of claim:

The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”;

Many insurance policies define occurrence to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  The insurance carriers and courts may evaluate closely if RICO meets the definition of an occurrence with emphasis on the word accident.  Various sources define accident as being unforeseen, unplanned, and unexpected that can be associated with acts of God.  Using the example cited by the committee, the operating dispensary whose neighbor files a RICO claim is a consequence of their licensed distribution of cannabis.

For most people, a lawsuit of this nature would be difficult to quantify as being in the same category of a car accident or customer falling in the parking lot.  Both of these events were uncertain.  The filing of a lawsuit isn’t accidental, but a legal response by a party who believes they’ve suffered harm due to a known violation of federal law. 

Is RICO excluded on the cannabis insurance policy?

Exclusions are specific policy language meant to inform the policy holder when coverage is not offered.  The insurance carrier’s “carve out” the risk they don’t want to cover.  We’re unaware of commercial general liability policies excluding RICO lawsuits.

RICO has been excluded in other cannabis insurance policies such as product liability and directors & officers insurance.   

Is RICO covered or not? 

Based on our experience, we don’t see a clear path exists through a commercial general liability policy to offer coverage for RICO claims and lawsuits unless the committee has insurance carriers offering this type of coverage with policy language to support their claim.  Furthermore, there are cannabis insurance policies that may require the customer to reimburse the insurance company for the cost of the claim as a result of the loss not being covered.  This would be a harsh consequence for the cannabis licensee.

If RICO lawsuits are filed, the insurance carrier responsible for the claim may issue a reservation of rights letter to initially defend the lawsuit, while they determine if coverage should be offered through trial or settlement.   Reservation of rights letter are common practice used by claims departments to temporarily investigate a claim, while providing the carrier the right to terminate their obligations at any time.     

The first hurdle will be the insurance industry determining if a RICO lawsuit is an insurable risk due to the certainty of a cannabis licensee violating federal law.  The second hurdle will be meeting the definition of an occurrence and accident.   

NCIA Cannabis Insurance Overview