Landlords Take Heed: The Marijuana Exclusion - Daniel A. Taylor

July 25, 2011

In Pietrangelo v. Gore Mutual Insurance Company [2011 ONCA 162 (March 2, 2011)], the Ontario Court of Appeal dismissed a claim for coverage by an insured landlord who suffered the total loss of its rental property when a tenant caused an explosion while producing hashish. The Court of Appeal held that landlord’s action to enforce its claim under the policy was properly dismissed at trial on the basis of the Marijuana Exclusion. 

This case is significant because it enforces an exclusionary clause that is found in most residential property insurance agreements in a circumstance where a diligent landlord could not have reasonably known of or prevented the illicit activity. 

Mr. and Ms. Pietrangelo purchased a modest one-story house and fixed it up to rent, with a long-range view to one day retiring to it. In the spring of 2005, the Pietrangelos rented the house to Donna Crawford and her twenty-something son, Michael Arquette. Mr. Arquette, referred to by trial judge as “a person of questionable character and of even more dubious entrepreneurial ability,” was attempting to convert marijuana to hashish by means of a homemade device when it exploded. As a result of the explosion, Mr. Arquette and a companion were severely injured and the house was completely destroyed by fire. 

Mr. Arquette subsequently plead guilty to intentionally or recklessly causing damage to a dwelling house and unlawfully producing cannabis resin (hashish).

Following the fire, the Pietrangelos filed a proof of loss claim under the rental property policy. The insurer, Gore Mutual Insurance Company, investigated and denied the claim relying upon an exclusionary clause in the insurance policy. The clause, referred to at trial as the Marijuana Exclusion, provides that “we do not insure…direct or indirect loss or damage…to dwellings…used in…processing [or] manufacture…of marijuana or any product derived from or containing marijuana.”

The Pietrangelos commenced an action to enforce the fire loss claim under the policy. At trial, they asserted that the Marijuana Exclusion should not apply to innocent, diligent landlords.  Furthermore, they argued that Mr. Arquette’s illicit use of the rental property fell outside the intended meaning and scope of the term “used” in the Marijuana Exclusion because the house had not been used or modified for the purpose of carrying on a marijuana grow operation.

The trial judge accepted without hesitation that the Pietrangelos had no idea of the unlawful activity, however, it did not change that fact that the house was used by Mr. Arquette for the specific purpose of producing cannabis resin. The trial judge explicitly rejected the argument that the “use of the home for unlawful purpose had to be habitual or customary, rather than merely occasional or incidental, in order to be caught by the Marijuana Exclusion.” 

At the heart of the matter is whether the Marijuana Exclusion is unlawful because it nullifies the purpose for which insurance is purchased and sold.  Insurance is a mechanism to transfer fortuitous contingent risks from the individual to the collective and is meant to strike an appropriate balance between the reasonable expectation of customers and the insurer’s need to maintain sufficient financial viability. The Ontario Court of Appeal agreed with the trial judge that the issue is not whether clause creates unfairness to the insured, but whether there is a rational basis for its existence. The Marijuana Exclusion was introduced due to the insurer’s legitimate business concern that it should not be exposed to claims for damage to property that is used for illicit acts such as marijuana grow operations.  The Court of Appeal confirmed that “there are certain risks, which insurers are entitled not to cover for legitimate business reasons relating to the ability to assess risks and set premiums.”

In light of the above, residential property insurers can take comfort in knowing that the Marijuana Exclusion will be enforced regardless of a landlord’s innocence and diligence. On the other hand, landlords have to worry that their own comprehensive insurance will not cover losses that are due to the unknown marijuana-producing activities of their tenants.

Landlords would be well served to utilize their rights (albeit limited) under the Ontario Residential Tenancies Act to periodically inspect their rental property. While inspections may discourage a full-scale marijuana grow operation, they would not necessarily reduce the risk associated with the kind of activity engaged in by Mr. Arquette.

Rental application requirements including character references, banking information and resumes are useful tools for screening prospective tenants, however, there is no foolproof way for landlords to avoid renting to the Mr. Arquettes of this world. As the law stands, landlords bear the risks associated with rotten tenants.  The trial court in Pietrangelo was clear on the proper apportionment of risk, stating, “[i]f the effect of this ruling is that, in the future, landlords will be at greater risk for a specified class of losses of which they are innocent, if it means that landlords must become more diligent still in winnowing out those potential tenants who are a threat to abuse their tenancies, then so it shall have to be.”

The Pietrangelos have sought leave to appeal to the Supreme Court of Canada.
 

Daniel A. Taylor is an Associate practicing litigation, commercial arbitration, and immigration at Perley-Robertson, Hill & McDougall LLP/s.r.l.