Michigan is joining the many states that allow the sale of recreational marijuana. Lawyers are busy getting these businesses up and running. A frequent question from lawyers is: “Will my malpractice policy cover me for this work?”.
As for getting attorney malpractice coverage in place for the law firm that does cannabis work, a survey of the insurers we work with show that they are generally operating under the ‘don’t ask, don’t tell policy’. As long the underwriter does not know about it, coverage can be obtained as most insurers’ applications never ask any questions related to marijuana. But if the insured volunteers information not asked, it is the luck of the draw if coverage can be obtained at a reasonable price.
You have malpractice coverage but the important question is “Will the insurer cover a marijuana related malpractice claim?”.
Excerpts from a typical lawyer’s professional liability policy show coverage issues get murky. The current Professional Solutions policy is a good example.
First, the policy carves out much of the cannabis coverage in the definition of damages:
“Damages do not include:
c. Civil or criminal fines, sanctions, penalties or forfeitures, whether or not related to, or as a result of local, state, or federal regulations, statutes, ordinance, law, rules of civil or criminal procedure, and any such judgments,”
Next the policy reinforces that it will not cover criminal acts in the Exclusion section:
“2. Dishonest, fraudulent, criminal, deliberate, intentionally wrongful, or malicious acts or omissions committed by or at the direction of, with the knowledge of, or ratified by any Insured.”
If the legal services are related to criminal defense of the client violating federal drug laws, likely there is no coverage issue.
But if the legal services relate to the support of a marijuana business it will depend on how the claim is presented and the substance of the claim so now it gets complicated.
Even without a specific exclusion the hazier answer comes when the attorney provides legal advice to set up or for ongoing support for any part of cannabis related businesses. The fact is that marijuana growing, sale, manufacture, and use under federal law remains an illegal activity under the Federal Controlled Substances Act (CSA). Almost every violation of CSA qualifies for RICO. Given this, certain State Supreme Courts, like Ohio, have stated that an attorney that assists cannabis businesses in providing legal advice commits an ethics violation. Additionally, an attorney that helps set up a cannabis business has knowingly helped a federal criminal enterprise (Exclusion #2 in the PSIC policy).
As for attorneys accepting cash payments for services from the cannabis industry, much of this money could go into the attorney’s IOLTA account or Trust account. Although the federal cases that have been brought against attorneys for these issues appear to be extreme examples, attorneys do open themselves up to money laundering charges and RICO violations under federal law. When the attorney is accused of a crime, attorney malpractice policies will not answer.
To further complicate the matter is the IRS.
According to 26 U.S. Code § 280E - Expenditures in connection with the illegal sale of drugs:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
This means that your gross marijuana sales are what you will be taxed on with no deductions allowed. If a Cannabis Business has any deductions, they are the target of an IRS audit. By extension, will a law firm be able to deduct any expenditures for facilitating Cannabis Enterprises?
Most attorney malpractice policies have similar coverage prohibitions. Ultimately, the reality is that even if the insurance underwriter will write attorney malpractice coverage for the cannabis attorney, the insurer’s claims department may decline to even defend the attorney.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080