Landlords of residential properties should be aware that the majority of liability insurance policies have a specific exclusion for damage caused by your tenant’s marijuana grow-op. The exclusion will typically read something like this:
We do not insure loss or damage:
18. to insured property however caused, which results directly or indirectly from any illegal substance activity. This exclusion will apply regardless of whether you are aware or unaware of such illegal substance activity or whether you are able or unable to control such illegal substance activity.
It is quite widely known that marijuana sold in Canada today is for the most part grown locally – indoors – in what might be your next door neighbour’s home. We are not talking here about somebody who has a few marijuana plants in their closet which they consume for personal use. We are talking about a large commercial operation where typically all three floors of a single detached home – basement, ground floor, and bedroom floor – are used exclusively to grow marijuana. Typically no one actually resides in the house as the entire house is dedicated towards this commercial enterprise.
After the home has been used as a grow-op for a relatively short period of time the degree of damage and destruction is unimaginable. I have a client who I will call “Megan” whose rental property, a modest single detached home in west end Ottawa, was being used as a grow-op by her tenant. It was discovered by the police and when Megan and I walked through the home the degree of damage was truly shocking. Huge holes had been cut through the walls and floors to allow for large air vents, 18 inches in diameter. A jackhammer had been used to break through the concrete foundation in order to bypass the electric meter. There was extensive mould throughout the home. All of the appliances, carpets, flooring, window coverings, etc, were completely ruined.
My client Megan is essentially left with a rental property that no longer has any value and for which there is no insurance coverage. Moreover, while theoretically a landlord in Megan’s position can bring civil action against her former tenant this remedy is usually not practical as the former tenants are typically either in jail or have disappeared. Often times marijuana grow-operators are associated with organized crime syndicates and a civil action against such a person could also be hazardous to a landlord’s health!
The typical liability insurance policy will contain a “Standard Mortgage Clause” which protects the interest of the mortgagee if, as in Megan’s case, she has a mortgage on the property. The Standard Mortgage Clause provides the mortgagee of the property with insurance coverage regardless whether or not the mortgagor / insured is covered under the insurance policy. A common example of how the Standard Mortgage Clause operates is when a mortgagor / insured commits arson, i.e., burns down her own property. Clearly the insurer would have no obligation to pay her as her act of arson is obviously a breach of the insurance policy. However, the mortgagee is not affected by her breach, and the damages, up to the outstanding balance on the mortgage, would have to be paid by the insurer to the mortgagee.
Similarly in a marijuana grow-op situation, although the mortgagor / insured is not covered due to the exclusion clause referred to above, the insurer would nonetheless still be obliged to pay the mortgagee. An important issue here is what amount is the insurer obliged to pay the mortgagee? In Megan’s case she has replacement cost insurance. The insurer says the cost to remediate the damage caused by the grow-op is $130,000.00. The outstanding balance of the mortgage at the time of the loss was $230,000.00.
We – my client Megan and I – take the position that this house cannot be remediated. Due to the extent of the damage caused by the grow-op the house must be demolished and rebuilt at a cost of $250,000.00. I believe there is strong support for our position due to, (1) the extensive damage and (2) the stigma associated with a home that has previously been a marijuana grow-op irrespective of whether or not the damage has been properly remediated.
Megan has demolished her rental property and we are currently in the midst of a dispute with the insurer over the amount that the insurer should pay the mortgagee. If we are right and the house and the property cannot from a practical point of view be remediated then the cost to replace the house would exceed the amount of the outstanding mortgage and the mortgagee would be paid in full. If we are wrong then the insurer’s obligation towards the mortgagee would be to pay the amount that would have been required to remediate the damage.
Where does all this leave Megan? Whatever amount is ultimately paid by the insurer to the mortgagee – whether it’s the remediation amount of $130,000.00 or the full outstanding mortgage amount of $230,000.00 – the insurer is still left with the remedy to subrogate against Megan for the amount that they have paid to the mortgagee. (Whether they will or not is an open question, however they certainly have that right.)
Any way you slice it Megan is in an unenviable position. The fact that she owns only three rental properties makes the loss that much more significant. A larger landlord with many units can obsorb the loss of one unit much more easily than a small landlord can.
So what can landlords to do protect themselves from this type of loss? The short answer is inspect your rental properties on a regular basis. Unfortunately Megan did not do this. Had she inspected her rental properties even once every two months she would have discovered the illegal activity and put an end to the tenancy thereby avoiding her loss.
Under the Ontario Residential Tenancies Act landlords of residential premises have the right to inspect their rental premises upon giving reasonable notice to their tenant. The Act says as follows:
27. (1) A landlord may enter a rental unit in accordance with written notice given to the tenant at least 24 hours before the time of entry under the following circumstances:
4. To carry out an inspection of the rental unit, if,
i. the inspection is for the purpose of determining whether or not the rental unit is in a good state of repair and fit for habitation and complies with health, safety, housing and maintenance standards, consistent with the landlord’s obligations under subsection 20 (1) or section 161, and
ii. it is reasonable to carry out the inspection.
In my opinion, landlords should definitely avail themselves of this right and should inspect their rental properties as diligently and as often as is reasonably possible.
Finally, landlords should ask their insurance broker if coverage for this type of loss is available. Although most policies do contain the exclusion clause which I referred at the beginning of this article, your broker may know of an insurer that writes an “All Risks” policy which does not contain a specific exclusion for marijuana grow-ops.
Howard Yegendorf is a partner in the law firms of Howard Yegendorf & Associates LLP and BrazeauSeller.LLP. He practices personal injury law. He is certified by the Law Society of Upper Canada as a specialist in civil litigation and is also a Chartered Insurance Professional. To find out more about Howard, please visit www.yegendorf.com or www.brazeauseller.com. To contact Howard, email firstname.lastname@example.org or call 613-237-5000 ext. 233.