Green Earth Wellness Center, LLC, The v. Atain Specialty Insurance Company

Filing 105

OPINION AND ORDER granting in part and denying in part 72 Motion for Summary Judgment, 75 Motion to Determine Question of Law Regarding Application of Federal Law and Public Policy, and 77 Motion for Partial Summary Judgment, by Chief Judge Marcia S. Krieger on 2/17/16. 74 Motion to Determine Question of Law Regarding Legal Interpretation of Policy Provision is denied. An Interim Case Management Conference is set for 5/10/2016 10:00 AM before Chief Judge Marcia S. Krieger. (dkals, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Marcia S. Krieger
Civil Action No. 13-cv-03452-MSK-NYW
THE GREEN EARTH WELLNESS CENTER, LLC,
Plaintiff,
v.
ATAIN SPECIALTY INSURANCE COMPANY,
Defendant.
______________________________________________________________________________
OPINION AND ORDER GRANTING AND DENYING, IN PART, PENDING MOTIONS
FOR SUMMARY JUDGMENT
______________________________________________________________________________

THIS MATTER comes before the Court pursuant to the Defendant’s (“Atain”) Motion
for Summary Judgment (# 72), the Plaintiff’s (“Green Earth”) response (# 81), and Atain’s reply
(# 88); Atain’s “Motion to Determine Question of Law Regarding Legal Interpretation of Police
Provision” (# 74), Green Earth’s response (# 83), and Atain’s reply (# 86); Atain’s “Motion to
Determine Question of Law Regarding Application of Federal Law and Public Policy” (# 75),
Green Earth’s response (# 80), and Atain’s reply (# 87); and Green Earth’s Motion for Partial
Summary Judgment (# 77), Atain’s response (# 84), and Green Earth’s reply (# 89).
FACTS
The Court offers a brief factual recitation here, and elaborates as appropriate in its
analysis.
Green Earth operates a retail medical marijuana business and an adjacent growing facility
in Colorado Springs, Colorado. In April 2012, Green Earth sought commercial insurance for its

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business from Atain.1 Atain issued Green Earth a Commercial Property and General Liability
Insurance Policy (hereinafter “the Policy”) that became effective June 29, 2012.
A few days earlier, on June 23, 2012, a wildfire started in Waldo Canyon outside of
Colorado Springs. Over the course of several days, the fire advanced towards the city. The fire
did not directly affect Green Earth’s business, but Green Earth contends that smoke and ash from
the fire overwhelmed it’s ventilation system, eventually intruding into the growing operation and
causing damage to Green Earth’s marijuana plants.
In November 2012, Green Earth made a claim under the Policy for the smoke and ash
damage. Atain hired several agents, including an adjuster and an investigator, to assess the
claim. The investigation extended over several months. Finally, in July 2013, Atain formally
denied the claim, finding that: (i) although Green Earth claimed that the smoke and ash damage
occurred beginning on July 1, 2012, smoke and ash from the fire would have been drawn into the
business premises by June 23 or 24, 2012, prior to the effective date of the Policy; (ii) Green
Earth’s misrepresentations about the date of the loss constituted material misrepresentations
under the Policy voiding any coverage; (iii) Green Earth did not mitigate its losses because its
personnel did not take any measures to protect Green Earth’s plants from incoming ash and soot
between June 23 and July 1; and (iv) Green Earth failed to give Atain timely notice of its loss,
waiting until November 25, 2012 to make a claim.
Separately, on June 7, 2013, thieves entered Green Earths grow facility through a vent on
the roof and stole some of Green Earth’s marijuana plants. At some unspecified point in time,
Green Earth made another claim on the Policy for damage to the roof and ventilation system.
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In reality, both parties conducted all aspects of this transaction trough their own
designated agents. Neither party attempts to disclaim responsibility for acts or statements made
by their agents, and thus, for purposes of convenience, the Court simply disregards the parties’
agents and refers to the parties themselves as performing the acts in question.
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Atain investigated the claim. On September 13, 2013, Atain denied the claim, finding that the
damage to the roof and ventilation system amounted to approximately $2,400, less than the
Policy’s $ 2,500 deductible.
On December 20, 2013, Green Earth commenced this action, asserting three claims: (i)
breach of contract by failure to pay the claims Green Earth made under the Policy; (ii) what
appears to be a statutory claim for bad faith breach of insurance contract under C.R.S. § 10-31104(h)(VII); and (iii) a claim for unreasonable delay in payment under C.R.S. § 10-3-1115.
Having now concluded discovery, both parties have filed a variety of dispositive motions.
Atain filed a Motion for Summary Judgment (# 72), arguing: (i) as to Green Earth’s bad faith
claim, Green Earth cannot show that Atain acted unreasonably in investigating either the fire
claim or the theft claim; (ii) if Atain acted unreasonably in handling either claim, Green Earth
cannot show that it did so knowingly or recklessly; (iii) as to the delayed payment claim, Green
Earth cannot show that its delay or denial in authorizing payment of the claim(s) was
unreasonable, for essentially the same reasons as set forth regarding the bad faith claim; and (iv)
as to the breach of contract claim, Green Earth’s claim for benefits relating to damage to potted
marijuana plants is barred by the “growing crops” exclusion in the Policy and the damage to the
roof and ventilation system is barred by the “theft” exclusion in the Policy.
Atain filed two separate “Motion[s] for Determination of Question[s] of Law.” The first
(#74) is fairly abbreviated, apparently requesting that the Court construe the Policy’s term
“commencing” consonantly with the construction given that term in Cher-D, Inc. v. Great
American Alliance Ins. Co., 2009 WL 943539 (E.D.Pa. Apr. 7, 2009). The other (# 75) is
considerably more elaborate, requesting that the Court resolve two questions: (i) “Whether, in
light of [Colorado’s Medical Marijuana Act], federal law, and federal public Policy, it is legal for

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Atain to pay for damages to marijuana plants and products, and if so, whether the Court can
order Atain to pay for these damages”; and (ii) “Whether, in light of [those same authorities], the
Policy’s Contraband Exclusion removes Green Earth’s marijuana plants and marijuana material
from the Policy’s coverage” (and arguing that the answer to the first is “no” and the answer to
the second is “yes”).
Green Earth filed its own Motion for Partial Summary Judgment (# 77), arguing that: (i)
as a matter of law, it is entitled to coverage for the loss of or damage to marijuana plants because
they constitute “Stock” under the terms of the Policy; and (ii) Green Earth is entitled to summary
judgment on Atain’s affirmative defense of “Policy limitations,” because neither the “growing
crops” or “contraband” exclusions prevent coverage of the damaged plants.
ANALYSIS
A. Standard of review
Rule 56 of the Federal Rules of Civil Procedure facilitates the entry of a judgment only if
no trial is necessary. See White v. York Intern. Corp., 45 F.3d 357, 360 (10th Cir. 1995).
Summary adjudication is authorized when there is no genuine dispute as to any material fact and
a party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). Substantive law governs
what facts are material and what issues must be determined. It also specifies the elements that
must be proved for a given claim or defense, sets the standard of proof and identifies the party
with the burden of proof. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986);
Kaiser-Francis Oil Co. v. Producer=s Gas Co., 870 F.2d 563, 565 (10th Cir. 1989). A factual
dispute is Agenuine@ and summary judgment is precluded if the evidence presented in support of
and opposition to the motion is so contradictory that, if presented at trial, a judgment could enter
for either party. See Anderson, 477 U.S. at 248. When considering a summary judgment

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motion, a court views all evidence in the light most favorable to the non-moving party, thereby
favoring the right to a trial. See Garrett v. Hewlett Packard Co., 305 F.3d 1210, 1213 (10th Cir.
2002).
If the movant has the burden of proof on a claim or defense, the movant must establish
every element of its claim or defense by sufficient, competent evidence. See Fed. R. Civ. P.
56(c)(1)(A). Once the moving party has met its burden, to avoid summary judgment the
responding party must present sufficient, competent, contradictory evidence to establish a
genuine factual dispute. See Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th
Cir. 1991); Perry v. Woodward, 199 F.3d 1126, 1131 (10th Cir. 1999). If there is a genuine
dispute as to a material fact, a trial is required. If there is no genuine dispute as to any material
fact, no trial is required. The court then applies the law to the undisputed facts and enters
judgment.
If the moving party does not have the burden of proof at trial, it must point to an absence
of sufficient evidence to establish the claim or defense that the non-movant is obligated to prove.
If the respondent comes forward with sufficient competent evidence to establish a prima facie
claim or defense, a trial is required. If the respondent fails to produce sufficient competent
evidence to establish its claim or defense, then the movant is entitled to judgment as a matter of
law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
This case involves cross-motions for summary judgment. "Because the determination of
whether there is a genuine dispute as to a material factual issue turns upon who has the burden of
proof, the standard of proof and whether adequate evidence has been submitted to support a
prima facie case or to establish a genuine dispute as to material fact, cross motions must be
evaluated independently." In re Ribozyme Pharmaceuticals, Inc., Securities Litig., 209 F. Supp.

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2d 1106, 1112 (D. Colo. 2002); see also Atlantic Richfield Co. v. Farm Credit Bank of Wichita,
226 F.3d 1138, 1148 (10th Cir. 2000); Buell Cabinet Co. v. Sudduth, 608 F.2d 431, 433 (10th
Cir. 1979) ("Cross-motions for summary judgment are to be treated separately; the denial of one
does not require the grant of another.").
Rather than address the motions seriatim, the Court finds it more appropriate to sort the
issues raised by the parties based on the two insurance claims Green Earth made on Atain, and
then to address the various issues raised by the parties’ motions that are pertinent to each claim.
B. The Waldo Canyon fire claim
To understand the context in which this dispute arises, the Court detours briefly into an
examination of Green Earth’s growing operation. The parties entered into a joint stipulation of
facts (# 71), designed to facilitate the Court’s consideration of the summary judgment motions.
The stipulation provides that Green Earth’s claim relating to the Waldo Canyon fire seeks
coverage for losses relating to several different classifications of plants: “mother plants,” “flower
plants,” “veg plants,” “clones,” and “finished product,” all of which were allegedly damaged by
smoke and ash. The parties’ stipulation does not elaborate on the particular function that each of
these classifications serve in the production process; it states only that all of these are “potted
plants” which are “grown indoors under artificial lighting in pots.”
Green Earth’s motion attaches an affidavit from its expert, Vincent Hanson. Mr.
Hanson’s affidavit recites “certain universal steps that all [marijuana] growers utilize” to produce
product, and attests that Green Earth follows those same steps.2 Greatly summarizing Mr.

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Atain contends that the Court should refuse to consider Mr. Hanson’s affidavit because
the opinions he presents “exceed the scope of opinions designated” in Green Earth’s Rule
26(a)(2) disclosures. The Court has reviewed those disclosures and finds that Mr. Hanson’s
opinions fall within his disclosed expertise in “the area of the marijuana industry.” Atain did not
offer any evidence of its own to dispute Mr. Hanson’s contentions.
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Hanson’s description, “mother plants” are plants of each individual strain of marijuana that
Green Earth offers. Mother plants are not cultivated to produce useable marijuana on their own;
rather, they are maintained by the grower solely for the purpose of producing a constant and
reliable supply of genetically-identical “clones.” A clone is a portion of the mother plant that is
cut off and planted in a growing medium until it produces its own root, becoming a viable
marijuana plant in its own right. The clones then grow to maturity. Mature clones are kept by
the grower in one of two states: a “vegetative” (or “veg”) state, in which the plant is kept under
near constant lighting to prevent it from flowering; and a “flowering” state, in which the plant is
subject to intermittent light and darkness in order to induce it to produce flowers and buds. At
the appropriate time, the grower harvests the flowering clone, cutting off flowers and buds (and
sometimes other portions of the plants), drying that material, and selling it.
For purposes of this case, Green Earth’s claim under the Policy relating to the Waldo
Canyon fire can be broken into two parts: a claim for more than $ 200,000 in damage to Green
Earth’s grow operation, namely its growing mother plants and clones, and a claim for
approximately $ 40,000 in damage to buds and flowers that had already been harvested and were
being prepared for sale.
Green Earth’s summary judgment motion seeks judgment in its favor on its breach of
contract claim, arguing that both losses were covered under the Policy’s grant of coverage over
Green Earth’s “Stock.” Atain seeks summary judgment on Green Earth’s breach of contract
claim relating to the Waldo Canyon fire claim, arguing: (i) that the Policy provision covering
“Stock” does not apply to the growing plants; (ii) that any grant of coverage that may exist
regarding the growing plants is subject to an exclusion from coverage of “growing crops”; (iii) a
somewhat unclear argument to the effect that Green Earth’s losses commenced prior to the

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coverage period; (iv) that any coverage of growing or finished marijuana is subject to an
exclusion of coverage as “Contraband”; and (v) that a contention that any grant of coverage is,
essentially, void as against public Policy. The Court takes these arguments in turn.
1. Policy interpretation generally
The parties have not addressed what jurisdiction’s law governs the Policy, but both rely
on Colorado law. The “Service of Suit Endorsement” in the Policy itself seems to suggest that
disputes between the parties will be governed by the law of the state in which the suit is brought
– here, Colorado. In Colorado, interpretation of a contract’s terms presents a question of law to
be resolved by the Court. Compass Ins. Co. v. City of Littleton, 984 P.2d 606, 613 (Colo. 1999).
When construing the terms of a contract, the Court’s ultimate objective is to give effect to
the parties’ mutual intentions. East Ridge of Fort Collins, LLC v. Larimer & Weld Irrig. Co.,
109 P.3d 969, 973 (Colo. 2005). Absent some showing that the parties intended otherwise, the
Court indulges in the assumption that the plain and ordinary meanings of the words used in the
contract reflect the parties’ agreement. Id.; Level 3 Communications, LLC v. Liebert Corp., 535
F.3d 1146, 1154 (10th Cir. 2008). Where the plain language is, of itself, insufficient to compel an
unambiguous interpretation, the Court turns to a variety of additional rules help shape its
analysis, including various canons of construction – e.g. that the Court should examine a given
phrase in the context of the agreement as a whole, not in isolation; that specific provisions
addressing an issue trump more general ones; that the Court should avoid constructions that
render a provision superfluous or nonsensical; and the Court must not add to or subtract from the
agreement’s terms. Id.; Cyprus Amaz Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299
(Colo. 2003). Extrinsic evidence may be relevant in demonstrating whether particular language
is or is not ambiguous. Id. If the Court still cannot ascertain the appropriate interpretation after

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all this, it defaults to the rule that ambiguities must be resolved against the drafter of the
language, here, Atain. State Farm Mut. Auto Ins. Co. v. Nissen, 851 P.2d 165, 166 (Colo. 1993).
2. “Stock”
The Policy provides that it covers, among other things, Green Earth’s “Business Personal
Property located in or on the [covered] building[s],” including “Stock,” which the Policy defines
as “merchandise held in storage or for sale, raw materials and in-process or finished goods,
including supplies used in their packing or shipping.” The parties agree that the finished product
– the harvested flowers and buds – allegedly damaged by the smoke and ash qualify as “Stock”
(although Atain disputes that such product is covered for other reasons discussed below). The
first question thus presented is whether the damaged mother plants and clones (whether in veg or
flowering states) are covered as “Stock.”
The Policy defines “Stock” to include “raw materials and in-process or finished goods.”
A “raw material” is “the basic material from which a product is manufactured or made;
unprocessed material.” Oxford English Dictionary, 3d Ed. The Court has some difficulty with
the notion that growing plants could be considered “raw materials.” In common vernacular,
producers of agricultural products do not typically refer to their growing plants as “raw
materials,” and Green Earth certainly has not pointed to notable examples of such a use of the
language. Green Earth points only to a single example of the phrase “raw materials” being used
to refer to growing agricultural products: the Merriam-Webster Dictionary (10th Ed.) uses the
example “wheat . . . is raw material for the flour mill.” Atain points out, somewhat persuasively,
that this sentence is probably referring to wheat that has been harvested and transported to the
mill for processing, not a crop of wheat that remains growing in the field.

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Neither party’s argument does much to advance the analysis beyond this point. Neither
party, for example, points to any discussions or correspondence between the parties about the
scope of any insurance policy that would ultimately issue, nor do the parties point to other
extrinsic evidence that would demonstrate that they shared some mutual understanding as to
what might be covered by the term “Stock.”3
Although the use of the term “raw material” to describe a growing agricultural product
appears somewhat idiosyncratic, the Court is not prepared to say, particularly at the summary
judgment stage, that it would require a construction of the Policy that excludes growing plants as
a matter of law. A cursory internet search reveals occasional instances where authors have used
the phrase “raw materials” in a context that could refer to growing plants.4 Although these
examples are infrequent and the term “raw materials” is used somewhat obliquely, the Court is
satisfied that there is at least a colorable argument to be made that the term “raw materials” can
sometimes include an agricultural producer’s growing plants. This would permit a conclusion
that the term “Stock” as used in the Atain Policy could cover Green Earth’s growing plants.

3

Rather, both parties focus their remaining arguments on certain deposition testimony by
Shannon Anderson, Atain’s Corporate Representative. This Court declines to speculate as to
how Ms. Anderson’s testimony should be construed because her testimony does not reflect a
general legal meaning for the term “Stock” nor negotiations or a mutual understanding by the
parties as to the meaning of the term.
4

For example, the United Nations’ Food and Agriculture Organization issued a 2001
report entitled “Principles and Practice of Small- and Medium-Scale Fruit Juice Processing.” See
ftp://ftp.fao.org/docrep/fao/004/y2515e/y2515e.pdf. Chapter 5 of that report is entitled “Raw
Material for Juice” and discusses matters such as selection of fruit trees and cultivation practices
to be used on growing fruit trees.
A 2015 student project, entitled “Commodity Chain Project – Wine,” found on the Ohio
State University’s website uses the heading “Raw materials” above a section that discusses,
among other things, the process of growing wine grapes. See https://u.osu.edu/wine/rawmaterials/.
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3. “growing crops”
This does not end the inquiry, however. Assuming that the Policy extends coverage to
the mother plants and clones as “Stock,” it nevertheless excludes coverage if the plants are
“growing crops”. Such exclusion is found in Paragraph A(1) of the Building and Personal
Property Coverage Form, which states that “Covered Property means the type of property
[covered by Paragraph] A.1” -- which includes the provision extending coverage to “Stock” –
“and limited in [Paragraph] A.2, Property Not Covered.” Paragraph A.2 operates to exclude any
coverage for “Land (including land on which the property is located), water, growing crops or
lawns.” The question becomes whether Green Earth’s plants constitute “growing crops.”
The Oxford English Dictionary defines “crop,” in this context, as “the yield or produce of
some particular cereal or other plant in a single season or in a particular locality,” “the whole of
the plants which engage the agricultural industry of a particular district or season,” (i.e. “this
year’s orange crop”) or “the produce of the land, either while growing or when gathered;
harvest” (e.g. “the farmer’s corn crops were decimated by the hail”). See also Merriam-Webster
Dictionary, 10th Ed. (“a plant . . . that can be grown and harvested extensively for profit or
subsistence”).
Green Earth argues that “crops,” by definition, must grow in outdoor soil, and that plants
raised indoors in containers – such as its mother plants and clones -- do not fit that definition.
For the most part, the dictionary definitions of “crop” do not support this assertion - they make
no particular distinction between plants grown indoors or outdoors. Although one of the Oxford
English Dictionary’s definitions does use the term “produce of the land,” the Court understands
that reference to be referring to plants generally, in the sense that plants rise out of soil (i.e. “the

11

land”), whether that soil is on the ground or in a pot. In other words, the Court understands
reference to “produce of the land” makes clear that a “crop of sheep” or other animals would be
an incorrect usage, as the animals do not grow out from soil.
The Court sees nothing in the plain meaning of the word “crop” that would seem to
differentiate between “crops” growing naturally in the solid earth and “crops” of plants growing
in pots or otherwise in artificial conditions such as an indoor greenhouse. Indeed, a search of
Westlaw reveals many instances in which courts have casually used the term “crops” to refer to
plants growing in controlled indoor environments. See e.g. Coastal & Native Plant Specialties,
Inc. v. Engineered Textile Products, Inc., 139 F.Supp.2d 1326, 1340 (N.D.Fl. 2001) (“These
grants were in part used to construct and modify greenhouses and to hydroponically grow crops,
such as onions”); Avila v. Lin, 2014 WL 6432279 (Ca.App. Nov. 17, 2014) (“Jiang destroyed
two greenhouses before he realized there were growing crops within them.”); see also Stuart v.
Haughton High School, 614 So.2d 804, 805 (La. App. 1993) (“Mr. Stuart began growing
tomatoes hydroponically in the controlled environment [of a hothouse] which allowed yearround tomato production . . . a hole in the plastic sheeting could cause the loss of the entire
tomato crop as the result of a sudden change in temperature”); In re Sunnyland Farms, Inc., 517
B.R. 263, 265 (N.M. Bankr. 2014) (“The only grop ever produced in the [hydroponic greenhouse
complex] was a crop of tomatoes produced in 2005.”). This is considerable evidence that the
common use of the term “crops” does not distinguish between plants growing indoors and plants
growing outdoors.
Interpreting “growing crops” as excluding coverage for Green Earth’s mother and clone
plants is also consistent with the parties’ pre-Policy actions. In April 2012, Atain issued a quote
for insurance to Green Earth; among the terms of that quotation is a provision that reads

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“Coverage does not extent to growing or standing plants.” The record suggests that Green Earth
apparently accepted this offer, as the parties then entered into a “binder” – a temporary contract
of insurance pending issuance of the formal Policy. The binder also contained a provision
reading that “Coverage does not extent to growing or standing plants.” Although the quote and
binder are extrinsic to (and ultimately superseded by) the Policy itself, Colorado law permits the
Court to consider extrinsic evidence for the purpose of ascertaining whether an ambiguity exists
in the Policy language. Level 3, 535 F.3d at 1155. Here, these documents suggest that the
parties have consistently understood that the ultimate Policy would not cover Green Earth’s
marijuana plants, and thus, construing “growing crops” to be ambiguous would inexplicably
deviate from the parties’ prior course of dealing.
Green Earth offers several arguments as to why the term “growing crops” should be
found to be ambiguous, and further, why the Court should find that it does not extend to the
plants themselves. Only the first of these arguments directly engages the “growing crops”
language in the Policy. Green Earth argues that the “growing crops” exclusion should be
construed according to the doctrine of noscitur a sociis (“it is known by its associates”). This
doctrine suggests that the Court should “avoid ascribing to one word a meaning so broad that it is
inconsistent with its accompanying words.” Yates v. U.S., 135 S.Ct. 1074, 1084 (2015). Green
Earth argues that the phrase “growing crops” should be given a construction that shares a
common character with the other terms --“land,” “water,” and “lawns” – used in that exclusion.
It argues that all three of these terms seem to be describing real property: the solid earth, bodies
of water found on it, and outdoor areas of grass attached to the earth. From this, Green Earth
urges that the phrase “growing crops” should be limited to those crops that grow in and attached
to the surface of the earth, not to crops that are grown in pots.

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The Court is not persuaded that the other terms used in the Policy warrant the assumption
that the term “growing crops” describes only plants growing outdoors, but more importantly, the
Court rejects the argument because the doctrine of noscitur a sociis may not be used to create an
ambiguity where one otherwise does not exist. Dillabaugh v. Ellerton, 259 P.3d 550, 554
(Colo.App. 2011). Finding that there is no inherent ambiguity in the phrase “growing crops,”
the Court declines to resort to noscitur a sociis to force a different conclusion.
Second, Green Earth argues that marijuana plants cannot be considered “crops,” based on
various definitions found in federal and state statutes. For example, it points to regulations
implementing the Federal Crop Insurance Act, 40 C.F.R. § 180.1, and notes that those
regulations do not enumerate marijuana among its “crop groups.” It points to a March 25, 2015
notice from the Colorado Department of Agriculture, articulating that agency’s “Policy regarding
the criteria for pesticide use that would not be a violation of the label when used for the
production of marijuana” in Colorado. The notice recites that the Department attempted to
determine “which pesticides, if any, might be used legally on marijuana,” because “pesticide
labels will specify the particular crops . . . to which they can be applied.” The Department
consulted the various crop groups in that same federal regulation and, not surprisingly,
concluded that “[n]owhere . . . is marijuana listed under any crop grouping.” Green Earth also
cites to the regulations of the Colorado Department of Revenue, pointing out that in various
locations, these regulations dictate that growing plants “shall be considered plant inventory” or
“shall be accounted for as inventory.” From these, Green Earth argues that, legally, growing
marijuana cannot be described as “crops.” The Court rejects this argument entirely. The fact
that various regulatory agencies might refer to marijuana plants as “inventory” for one purpose
or decide that they do not fit within existing definitions of “crop groups” for another purpose is

14

irrelevant for the purpose of determining the parties’ intentions as to how the particular language
in this Policy should be construed. Neither the Policy nor the communications between the
parties even remotely suggest that these references were pertinent to or considered by the parties
at the time the policy terms were negotiated.
Green Earth’s final, and most elaborate, argument is that it intended and expected that the
Policy would cover the plants, and thus, the Policy should be construed to extend such coverage.
This argument springs from a perfectly reasonable premise - Green Earth sought to insure its
plants through the purchase of business insurance. From that, Green Earth points out that
Colorado law adheres to the “reasonable expectations” doctrine: that courts will honor the
reasonable expectations of an insured where circumstances attributable to an insurer have
deceived a objectively reasonable insured into believing that it is entitled to coverage for a
certain loss. Bailey v. Lincoln General Ins. Co., 255 P.3d 1039, 1053 (Colo. 2011). But the
reasonable expectations doctrine is not applicable here. The doctrine requires an insured to show
“that its expectations of coverage are based on specific facts which make these expectations
reasonable”; “bare allegations of Policyholders that they expected certain coverage” is not, of
itself, sufficient. Id. at 1054. Green Earth offers nothing but a bare statement of its expectation
that the Policy would cover its growing plants - the affidavit of Chris Fallis, one of its owners,
states that “It was my understanding and my intention that the Policy of insurance provide
coverage for the potted marijuana plants” and “It was absolutely not my intention to seek
insurance coverage that excludes the very plants that are my business.” Mr. Fallis’ affidavit is
notable for its carefully chosen language, as he does not assert that he expressed his intention to
Atain, much less suggest that Atain understood and agreed to meet the expectation. To the
contrary, the extrinsic evidence in the record indicates that Atain repeatedly, plainly, and

15

conspicuously advised Green Earth that growing plants would not be covered, and there is no
evidence that Green Earth ever objected.
Finally, Green Earth offers an appeal to common sense: that there would be little point to
it obtaining insurance if the insurance did not going to cover its plants. This might be true if the
Policy provided no benefit to Green Earth. But the Policy is far from worthless to Green Earth
even if it did not cover growing plants. The Policy still insured Green Earth against general
liabilities that could arise from operation of a commercial storefront and insured Green Earth
against damage to non-plant business property, such as lighting systems, irrigation systems,
ventilation systems, timers, computers and business machines, and so on. In this sense, the scope
of the intended coverage is somewhat reflected in the questions and answers on Attain’s
“Medical Marijuana Dispensary Supplemental Application.” This supplemental application is a
one-page form primarily focuses on operation of Green Earth’s dispensary business: e.g. “Do
you utilize security doors?,” “Does the applicant have a weapon on premises?,” “Do you utilize
private security guards?,” etc. Only one question on the application even inquires about growing
plants – “Do you grow Marijuana or other cannabis plants on the premises?” – and it does not
ask for elaboration in the event of a “yes” answer. If, as Green Earth argues, it would be
common sense for an insurance Policy written for a marijuana business to cover growing plants,
one would also assume that the insurer’s marijuana-specific application form would make
detailed inquires about the number, types, and values of the plants it was going to insure.5 The
fact that Atain never sought details about Green Earth’s grow operation further refutes any

5

Green Earth’s briefing makes certain representations about the nature and scope of
Atain’s pre-Policy inspections of Green Earth’s premises and operations. As best the Court can
tell, those representations are not supported by citations to evidence of such inspections.
16

contention that Green Earth’s expectations that the Policy would cover its growing plants was a
reasonable one.
Accordingly,6 the Court finds that the Policy’s exclusion of coverage for “growing crops”
unambiguously encompasses any body of plants tended for their agricultural yield, at least until
they are harvested. This term clearly encompasses Green Earth’s mother plants and clones.
This means that the only plants that are covered by the Policy are those that are “Stock”,
but not “growing crops.” Thus, the Court finds that mother plants or clones are growing crops,
and therefore are not covered by the Policy.
5. “commencing”
Green Earth’s claim from the Waldo Canyon fire also includes a claim for coverage of
approximately $ 40,000 worth of “finished product” – that is, harvested buds, flowers, and other
plant material. Atain essentially concedes that this material falls within the grant of coverage for
“Stock” and is not excluded by the “growing crops” exclusion.
However, Atain argues that Green Earth’s loss “commenced” as early as June 26, 2012
prior to the Policy taking effect on June 29. It points to a Policy provision that provides that the
Policy “cover[s] loss or damage commencing during the Policy period.” Atain argues that the
Court should construe the term “commencing,” as meaning “beginning.” Green Earth does not
dispute this meaning, but argues that there is a disputed question of fact as to when its losses
from the Waldo Canyon fire began.
Given that both Atain and Green Earth agree that the term “commencing,” as used in the
Policy, means “beginning,” the Court declines to construe the term. The Court agrees that the

6

Green Earth raises several additional arguments, beyond those discussed here, in support
of its contention that the “growing crops” exclusion should not apply. The Court has considered
all of those arguments and finds them to be without merit.
17

parties’ dispute is one of fact – when did Green Earth’s losses actually begin to occur? Both
parties have identified evidentiary support for their own answers to this question, and thus, a trial
is required.
5. “Contraband”/public Policy
Finally, Atain argues that application of another exclusionary provision in the Policy
excludes coverage for lost harvested buds and flowers. It invokes the exclusion of coverage for
“Contraband, or property in the course of illegal transportation or trade” and argues that public
policy requires that coverage be denied, even if the Policy would otherwise provide it.
The Policy does not define the term “Contraband,” so the Court turns to the common and
ordinary meaning of that term: “goods or merchandise whose importation, exportation, or
possession is forbidden.” Meriam-Webster Collegiate Dictionary (10th Ed.). The Court accepts
Atain’s observation that the possession of marijuana for distribution purposes continues to
constitute a federal crime under 21 U.S.C. § 841(a)(1) and (b)(1)(D). But, as the parties are wellaware, the nominal federal prohibition against possession of marijuana conceals a far more
nuanced (and perhaps even erratic) expression of federal Policy. The Court will not attempt to
explain nor summarize, the conflicting signals that the federal government has given regarding
marijuana regulation and enforcement since 2009.7 It is sufficient to recognize that as early as

7

The Court offers only selected citations, leaving the task of piecing together a clear
federal position as an exercise for the reader. See generally Memorandum from Deputy Attorney
General David W. Ogden, Oct. 19, 2009, text at http://tinyurl.com/nry8vtv; Memorandum from
Deputy Attorney General James M. Cole, June 29, 2011, text at http://tinyurl.com/oqg2owq;
Memorandum from Deputy Attorney General James M. Cole, Aug. 29, 2013, text at
http://tinyurl.com/nrc9ur8 (collectively, reflecting Department of Justice’s shifting priorities
regarding enforcement of the Controlled Substances Act and expressing varying degrees of
deference to states engaged in state regulation of marijuana); P.L. 113-235, § 538 (2014); P.L.
114-113, § 542 (2015) (collectively, denying budget funds to the U.S. Dept. of Justice for actions
that would “prevent [specific] states from implementing their own State laws” regulating the
cultivation and distribution of medical marijuana);U.S. v. Marin Alliance for Medical Marijuana,
18

2009, and again mere weeks before Atain formally denied Green Earth’s claim from the Waldo
Canyon fire, federal authorities had made public statements that reflected an ambivalence
towards enforcement of the Controlled Substances Act in circumstances where a person or
entity’s possession and distribution of marijuana was consistent with well-regulated state law.
Other than pointing to federal criminal statutes, Attain offers no evidence that the application of
existing federal public policy statements would be expected to result in criminal enforcement
against Green Earth for possession or distribution of medical marijuana, nor does Atain assert
that Green Earth’s operations were somehow in violation of Colorado law. In short, the Policy’s
“Contraband” exclusion is rendered ambiguous by the difference between the federal
government’s de jure and de facto public policies regarding state-regulated medical marijuana.
With that ambiguity in mind, the Court turns to the parties’ mutual intention regarding
coverage of Green Earth’s saleable marijuana inventory. Just as the extrinsic evidence strongly
suggested that the parties intended to exclude coverage for growing plants, the same evidence
strongly suggests that the parties mutually intended to include coverage for harvested plants
constituting Green Earth’s inventory. Atain’s repeated pre-Policy statements that it was refusing
to cover “growing plants” suggests, by negative implication, that it was willing to extend
coverage to harvested plants and other inventory. Moreover, unlike its apparent disinterest
regarding the scope and value of the grow operation, Atain’s Medical Marijuana Dispensary
Supplemental Application asks several questions about the amount and value of inventory that

2015 WL 6123062 (N.D.Ca. Oct. 19, 2015) (interpreting Congressional legislation cited above);
Solicitor General’s brief in States of Nebraska and Oklahoma v. State of Colorado, U.S. Sup. Ct.
Docket No. 22O144 ORG, text at http://tinyurl.com/hslwegl (urging U.S. Supreme Court to not
entertain a suit against Colorado by neighboring states, where the plaintiff states argued that the
federal Controlled Substances Act precluded state regulation of marijuana pursuant to the
Constitution’s Supremacy Clause).
19

Green Earth keeps on its premises – e.g. “How much inventory is displayed to customers?” (with
instructions to deny insurance if more than 25% is displayed); “How much [by value] of
inventory do you keep on premises during non-business hours?”; “After business hours, is all
inventory stored in a locked safe . . .?”. These questions indicate that some form of coverage of
Green Earth’s inventory was something contemplated by both parties.
More fundamentally, it is undisputed that, before entering into the contract of insurance,
Atain knew that Green Earth was operating a medical marijuana business. It is also undisputed
that Atain knew – or very well should have known – that federal law nominally prohibited such a
business. Notwithstanding that knowledge, Atain nevertheless elected to issue a policy to Green
Earth, and that policy unambiguously extended coverage for Green Earth’s inventory of saleable
marijuana. Nothing in the record ever indicates that Atain sought to disclaim coverage for Green
Earth’s inventory, much less that Atain ever informed Green Earth of its position that such
inventory was not insurable. In such circumstances, the Court finds that the record suggests that
the parties shared a mutual intention that the Policy would insure Green Earths’ marijuana
inventory and that the “Contraband” exclusion would not apply to it.
Under these circumstances, the Court finds that the “Contraband” exclusion is ambiguous
such that Atain is not entitled to summary judgment on Green Earth’s claim for breach of
contract arising from Atain’s refusal to pay for harvested plants damaged by the Waldo Canyon
fire.
This leaves Atain’s “public Policy” requests. Atain “asks for some direction and
assurances from this Court” as to how it should proceed. It “asks the Court to rule on” a specific
question: “Whether, in light of [federal and state law], it is legal for Atain to pay for damage to

20

marijuana plants and products, and if so, whether the Court can order Atain to pay for these
damages.”
These requests present problems. First, the Court does not and cannot give “assurances”
to a party about the legality of engaging in particular conduct, nor does the Court intend to offer
any particular opinion as to “whether . . . it is legal for Atain to pay for damages to marijuana
plants and products.” The Court assumes that Atain obtained legal opinions and assurances on
these points from its own counsel before ever embarking on the business of insuring medical
marijuana operations.8 Nor does the Court provide “direction” to parties as to how they should
proceed. The Court’s function here is purely adjudicatory – applying Colorado law.9 Green
Earth alleges that Atain made contractual promises, then breached them. With regard to such
claim, the Court merely interprets and applies the terms of the Policy, and where there is a
material factual dispute, directs that matter be set for trial. Any judgment issued by this Court

8

As noted, before it ever entered into the Policy, Atain knew of the nature of Green
Earth’s business and the peculiar legal concerns attendant to doing business in this sphere.
Atain chose to insure Green Earth’s inventory, without taking any apparent precautions to
carefully delineate what types of inventory would and would not be covered. Atain’s newfound
concerns that writing such a Policy might somehow be unlawful thus ring particularly hollow
and its request for an advisory opinion appears somewhat disingenuous.
Indeed, were the Court to be compelled to find that Atain promises were void as against
public Policy, the Court would be inclined to permit Green Earth to amend its pleadings to
replace any claims sounding in breach of contract with a claim that Green Earth’s payment of
premiums for an illusory promise of insurance operated to unjustly enrich Atain. Moreover,
given that Green Earth relied upon Atain’s apparent promise of coverage by not seeking out
alternative coverage, the Court would be inclined when exercising its equitable powers over such
a claim to measure Green Earth’s loss via expectation damages – that is, to award damages to
Green Earth that would reflect what Green Earth would have expected to receive had Atain
honored the coverage it promised. See generally Lewis v. Lewis, 189 P.3d 1134 (Colo. 2008)
(appropriate measure of remedy in unjust enrichment context is left to the sound discretion of the
court; affirming trial court’s remedy that preserved the plaintiffs’ expectations).

9

Notwithstanding Atain’s removal of this action from state to federal court, this Court
exercises subject matter jurisdiction premised on diversity of citizenship, and thus applies state
substantive law to the claims at issue here.
21

will be recompense to Green Earth based on Atain’s failure to honor its contractual promises, not
an instruction to Atain to “pay for damages to marijuana plants and products.”
The unarticulated sub-text to this argument appears to be a request that the Court declare
the Policy unenforceable as against public policy. Atain submits several cases in which courts
have tried to reconcile federal and state law with regard to marijuana. Most of these cases are
off-point, as they do not involve contractual claims in which both parties had a mutual intent to
treat marijuana products as insurable commodities, only to have one party unilaterally seek to
abandon that position later. Only Tracy v. USAA Cas. Ins. Co., 2012 WL 928186 (D.Hi. Mar.
16, 2012), involves the question of whether an insurer is liable for breach for failing to pay an
insurance claim for loss or damage to marijuana plants. There, the court found that an insured
whose possession of marijuana plants was in conformance with state regulations had an
insurable interest in those plants. The court ultimately concluded that the federal Controlled
Substances Act nevertheless prevailed over state law, such that enforcing the terms of the
insurance Policy “would be contrary to federal law and public Policy,” and granted summary
judgment to the insurer on the insured’s breach of contract claim. Id.
For the reasons discussed above, and particularly in light of several additional years
evidencing a continued erosion of any clear and consistent federal public policy in this area, this
Court declines to follow Tracy. Accordingly, the Court declines Atain’s indirect invitation to
declare the Policy void on public policy grounds. Atain, having entered into the Policy of its
own will, knowingly and intelligently, is obligated to comply with its terms or pay damages for
having breached it.
Thus, the Court finds that Green Earth’s breach of contract claim with regard to the
approximately $ 40,000 claim made by Green Earth for damage to harvested marijuana buds and

22

flowers damaged in the Waldo Canyon fire must be tried. Bcause Green Earth’s claim that Atain
breached the contract remains colorable, the Court denies Atain’s motion for summary judgment
on Green Earth’s statutory claims for bad faith breach and unreasonable delay in payment
relating to that portion of the Waldo Canyon claim. Those claims shall proceed to trial as well.
C. Theft claim
This claim arises from an incident on June 7, 2013, in which thieves entered Green
Earth’s grow facility through a roof vent and stole various plants. Green Earth made a claim on
Atain for benefits under the Policy because of that incident. Green Earth did not seek coverage
for the stolen marijuana plants, but did assert that the thieves caused damage to the roof and
ventilation system, and that those losses occasioned certain consequential losses in the form of
damage to drywall and other interior contents of the building from water that came through the
hole the thieves created in the building’s roof. Atain seeks summary judgment on Green Earth’s
claims arising out of this incident.
Atain first points to language in the Policy that excludes coverage for “loss or damage
caused by or resulting from theft.” However, it concedes that this exclusion is in turn subject to
certain limitations, most notably, that coverage does exist for “Building damage caused by the
breaking in or exiting of burglars.” Atain argues that Green Earth cannot show that the building
damage caused by the thieves was caused in the course of the thieves “breaking in or exiting” the
building. It also makes an abbreviated argument that Green Earth cannot show that the amount of
covered damage arising from the theft exceeds the Policy deductible of $ 2,500.
In response, Green Earth tenders the affidavit of Justin Flowers that unambiguously states
that Green Earth (and not its landlord) was the owner of the ventilation system, and that he
observed security camera footage showing the thieves entering the building through a hole they

23

created in that system. Green Earth also tenders the report of David Poynter, a contractor, who
opines that the damage to the roof and duct work is approximately $ 8,000.
Atain does not meaningfully dispute these assertions in its reply, nor does it point to any
contrary evidence as to causation. At most, it refers to remarks that its own adjuster valued the
claim differently than did Mr. Poynter. Thus, there is a triable dispute as to whether the damage
caused by this incident is covered by the Policy and whether the amount of that loss exceeds the
Policy’s deductible. Atain’s motion seeking summary judgment on Green Earth’s breach of
contract claim as it relates to the theft claim is denied.
However, the Court finds it appropriate to grant summary judgment to Atain on Green
Earth’s bad faith breach of contract claim and unreasonable delay in payment claim as it relates
to the theft claim. Both of these claims require a showing that the insurer acted “unreasonably”
in denying the claim or refusing to pay benefits. To prove that an insurer acted unreasonably, an
insured must come forward with evidence (typically from an expert) that the insurer’s conduct
violated industry standards, and the determination of reasonableness is an objective one. Estate
of Morris v. Copic Ins. Co., 192 P.3d 519, 524 (Colo.App. 2008). Here, Atain’s original basis
for denying the theft claim was that its adjuster valued the claim at approximately $ 2,400, below
the Policy’s $ 2,500 deductible. Green Earth certainly disagrees with Atain’s adjuster’s
valuation, but Green Earth has not come forward with evidence to show that Atain’s valuation
was objectively unreasonable – it does not, for example, tender an expert who opines that no
reasonable contractor or adjuster could believe that the identified damages could be fully
repaired for as little as $ 2,400, or demonstrate that Atain’s adjuster conspicuously overlooked
substantial components of the claim that would have been covered.

24

Green Earth relies on Senior Judge Matsch’s order denying summary judgment in Jewkes
v. USAA Cas. Ins. Co., D.C. Colo. Case No. 13-cv-01673-RPM (Jun. 26, 2014). There, Judge
Matsch denied an insurer’s motion for summary judgment on an insured’s bad faith claim,
explaining that “[t]o grant this motion this Court must find that an insurance company’s reliance
on expert reports is itself a sufficient showing of a reasonable basis for denial of benefits.” Id.
Judge Matsch went on to find that an adjuster’s subjective evaluation of a claim is insufficient to
establish reasonableness under the objective standard, and that “the veracity of the opinions
expressed in . . . expert reports, the quality of the investigations done and the competence of the
investigators are relevant issues [that] should be [decided] by a jury.” Id.
This Court disagrees. Under Colorado law, the party asserting the bad faith claim has
the burden of proof, and thus the burden of demonstrating the unreasonableness of the insurer’s
actions lies with the insured. See Pham v. State Farm Mut. Automobile Ins. Co., 70 P.3d 567, 572
(Colo.App. 2003). Judge Matsch improperly placed the burden on the insurer to demonstrate
that its position was reasonable as a matter of law, when the proper allocation of proof requires
the insured to demonstrate that the insurer’s position is unreasonable. It is not sufficient for an
insured to simply tender a different valuation of a claim; indeed, were the Court to hold that a
mere disagreement between parties as to the valuation of a claim created a triable bad faith
claim, essentially every insurance dispute would proceed to trial on such a claim, as disputes
between the insurer and insured over the proper valuation of the loss are routine.
Because Green Earth has not come forward with evidence to demonstrate that Atain’s
valuation of the losses covered under the theft claim was unreasonable, Atain is entitled to
summary judgment on Green Earth’s bad faith claims relating to the theft claim.
CONCLUSION

25

For the forgoing reasons, Atain’s Motion for Summary Judgment (# 72) and “Motion to
Determine Question of Law Regarding Application of Federal Law and Public Policy” (# 75),
and Green Earth’s Motion for Partial Summary Judgment (# 77) are each GRANTED IN PART
and DENIED IN PART as follows: Atain is entitled to summary judgment on Green Earth’s
claims as they relate to damage to growing marijuana plants and Green Earth’s claims for bad
faith breach of contract or unreasonable delay in payment as they relate to Green Earth’s
insurance claim arising out of the June 2013 theft.10
Green Earth’s breach of contract, bad faith, and delayed payment claims will proceed to
trial with regard to Green Earth’s claim for benefits arising out of damage to harvested marijuana
buds and flowers allegedly caused by the Waldo Canyon fire, and Green Earth’s claim for breach
of contract only will proceed to trial with regard to Green Earth’s claim for insurance benefits
arising out of the June 2013 theft. Atain’s “Motion to Determine Question of Law Regarding
Legal Interpretation of Policy Provision” (# 74) is DENIED.
Although the Court would normally direct the parties to begin preparation of a Proposed
Pretrial Order and schedule a Pretrial Conference at this point in the litigation, given the
narrowing of the claims as set forth above, the Court instead finds it appropriate to set the matter
for an Interim Case Management Conference pursuant to Fed. R. Civ. P. 16(c)(2). At that
conference, the parties shall be prepared to enter into all appropriate factual stipulations so as to
alleviate the need for evidentiary presentation of undisputed facts, to resolve any claims or
portions of claims for which no further dispute exists, and to otherwise narrow and sharpen the

10

No party has requested that the Court certify any partial judgment pursuant to Fed. R.
Civ. P. 54(b), and the Court declines to do so. Judgment on these claims in favor of Atain shall
enter at the conclusion of all remaining proceedings in this case.
26

case further before investing further time and resources into pretrial preparation. The Court will
conduct this Interim Case Management Conference at 10:00 a.m. on May 10, 2016.
Dated this 17th day of February, 2016.
BY THE COURT:

Marcia S. Krieger
Chief United States District Judge

27