Although the 2018 Farm Bill carved out hemp from the federal Controlled Substances Act, few court rulings have addressed the legal distinction between federally-legal hemp and federally-illegal cannabis. A new opinion from the District of Oregon (Bogard v. Cty. Mut. Ins. Co., No. 1:19-CV-00705-AA, 2021 WL 4269991 (D. Or. Sept. 20, 2021)) found insurance coverage for a fire arising from the preparation of CBD salve, notwithstanding the policy’s Controlled Substance exclusion. Bogard provides significant insights that are relevant not only to insurance coverage, but can be applied to other disputes involving cannabis, as well as a helpful botany lesson.
The case involved an Oregon fire loss arising under a homeowner’s insurance policy issued by Country Mutual to Peter and Wendy Bogard. According to the court filings, the Bogards were legally growing hemp in accordance with a “Hemp Pilot Program,” and they used that hemp to make CBD products, including a CBD salve marketed as “Dr. B’s CBD.” The fire occurred in January 2019, while Mr. Bogard was making a batch of CBD salve in his garage.
When the Bogards submitted an insurance claim, Country Mutual denied coverage based on the policy’s Controlled Substance exclusion, maintaining that the fire arose from a controlled substance, as defined in the policy to mean “as defined by the Federal Food and Drug Law at 21 U.S.C.A. Sections 811 and 812 (as amended), regardless of whether the controlled substance is legal under any state law (for example: marijuana).” The dispute hinged on whether the hemp used to make the CBD salve contained less than 0.3 % delta-9 THC, which is the limit after which cannabis and any derivatives become federally-illegal controlled substances under the Controlled Substances Act and 2018 Farm Bill. As a result, the legal dispute became highly technical, and the court ruling ultimately centered on expert testimony regarding the regulations and testing surrounding cannabis products.
Significantly, the CBD here was sourced from two batches of hemp, which was independently lab tested at EVIO labs using Oregon state testing standards prior to the fire. The testing lab provided results showing the “total THC” level, which was calculated using a state-imposed mathematical formula that included delta-9 THC, as well as another cannabinoid compound, THCA.1 The testing data showed that one of the batches had a “total THC” content of 0.381 %, although the delta-9 THC content was “effectively zero.” Based on the total THC content, Country Mutual argued that the fire arose from a controlled substance under federal law and was excluded under the policy.
The court disagreed, noting first the cardinal rule that the insurer bears the burden of proving an exclusion to coverage applies. Because the policy specifically (and only) referred to the federal CSA, the court found it inconsequential that Oregon state law had standards for deriving total THC content. The court also pointed out that federal law prohibited only cannabis with a delta-9 THC content of greater than 0.3 % and that federal law had no standards for calculating the total delta-9 THC content at the time (although a framework was established later). For that reason, the Court refused to rely on the total THC level in the testing results, which included delta-9 THC that was created by conversion from THCA. Under the “plain terms” of the policy and the “unadorned statutory definition of hemp” (as cannabis with less than 0.3% delta-9 THC), the court found that the Controlled Substance exclusion did not apply.
This case provides some important takeaways:
- The regulations are key. This case exemplifies the importance of staying apprised of current state and federal laws, regulations, and implementing rules, which are constantly changing. Understanding the distinction between federal and state law provided the angle to argue for coverage in this case.
- The timing of a loss matters. Because laws, regulations, and rules governing cannabis are constantly changing, the applicability of certain exclusions to coverage may change depending on when a loss occurs.
- Science and expert testimony are significant. Due to the technical nature of the science and testing of cannabis, expert testimony may be required to establish coverage.
The most important takeaway is that coverage denials should not be accepted at face value. Courts will find coverage, even in cases that implicate complicated questions of legality, if the plain language of the policy dictates that result.
 Experts testified that THCA in a lab sample can convert to delta-9 THC through decarboxylation because THCA is “thermally unstable and can be decarboxylated when exposed to light or heat via smoking, baking, or refluxing.”