Court Reverses Marijuana Fire Insurance Ruling

On May 26, the California Court of Appeals published an opinion in Mosley v. Pac. Specialty Ins. Co., concerning substantive issues of contract interpretation for fire insurance policies. The insured, a homeowner with a fire insurance policy, suffered fire damage after a tenant, without notifying the insured, illegally altered the electrical grid in order to grow marijuana more efficiently.

The homeowner’s fire insurance policy excluded “coverage for hazards increased by means within the insured’s control or knowledge.” When the insured filed a claim under the policy, the insurer denied the claim proffering that any conduct of a tenant that increases the hazard that results in fire loss is under the “control or knowledge” of the homeowner. The homeowner pursued legal action under breach of contract; the lower court granted the insurer’s motion for summary judgment “finding that the [insurer] properly denied coverage because the [insured] had control over their tenant’s conduct.”

On appeal, the California Court of Appeals reversed the trial court’s ruling that granted the insured’s motion for summary judgment. The court centered the decision on the legal standard for determining when a homeowner has “control or knowledge” over an “increased hazard” created by a tenant’s behavior. The insurer argued that while the insured “had no knowledge of [the] marijuana growing operation…they had control over it because they had control over what occurred in the home.” The court disagreed with this interpretation and determined that an “insured increases a hazard ‘within its control’ only if the insured is aware of the hazard or reasonably could have discovered it through exercising ordinary care or diligence.”

Theretofore, the court concluded, as “it is undisputed the [insured] did not know about [the] marijuana growing operation or [the] altering [of] the property’s electrical system” and there exists “no evidence…the [insured] could have discovered [the] marijuana growing operation ‘by exercising ordinary care or diligence,’ ” “we believe whether [the tenant’s] conduct was ‘within the control’ of the [insured] is a fact issue for the jury to decide because the record is silent as to what, if anything, the [insured] reasonably could have done to prevent or discover [tenant’s] marijuana growing operation.”

The dissenting judge disagreed with the majority’s analysis as the majority opinion based the interpretation of “control or knowledge” on “various out-of-state authorities, primarily federal and Minnesota case law from the 1930s” when “there is no authority in California law for such an interpretation.” The judge further stated that such an analysis, even if correct, should never have been conducted by the court on procedural grounds as the insured failed to challenge the interpretation of the provision at the trial court level. As such, the dissenter concluded that “the failure to preserve a point below constitutes a [forfeiture] of the point” and thus any analysis of the provision was inappropriate as “it would be manifestly unjust to the opposing parties, unfair to the trial court, and contrary to judicial economy to permit a change of theory on appeal.”