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Joanne Wojcik

Professional services firms wary of liabilities for marijuana industry work

March 16, 2014 - 6:00am

Workers trim marijuana at a dispensary and grow operation. Professionals serving the sector face liability issues.

Workers trim marijuana at a dispensary and grow operation. Professionals serving the sector face liability issues.


Marijuana remains an illegal substance under federal law, leaving accounting, legal and other professionals who advise and serve the state-authorized medical and recreational marijuana industries doing so at their own risk.

Some lawyers who have served medical marijuana business clients in Colorado and Washington, the two states that legalized recreational marijuana use as of Jan. 1, have received cancellation notices from their professional liability insurers as their affiliation with those businesses became known.

Still, at least one California-based managing general agent not only continues providing professional liability coverage to accountants, lawyers and others with clients involved in cannabis businesses, the coverage will even pay legal defense costs arising from criminal actions filed against the professionals as long as they comply with state law (see related story)

“Certain (solo lawyers) have lost their malpractice insurance for practicing in this area, and in very surprising places,” said Hilary Bricken, lead attorney of the Canna Law Group, a practice area of Harris Moure P.L.L.C. in Seattle. “The criminal defense lawyer with whom we work very closely on a lot of these issues actually lost his insurance for defending medical marijuana patients, which was a shocker. I can actually think of much worse clients that would pose greater liability than medical marijuana patients.”

That Seattle-based attorney, who asked not to be identified, said he received a letter from Hanover Insurance Co. at the end of 2013 saying it would not renew his coverage because he worked in the medical marijuana industry.

“I wrote a letter back and said I don't represent medical marijuana businesses unless they've been charged with a crime,” he said, When the insurer did not respond, he found coverage from another insurer, which he declined to identify.

“People need lawyers to navigate the complex regulatory system governing medical and recreational marijuana,” said Gabriel Plotkin, a partner at Miller Shakman & Beem L.L.C. in Chicago. “However, the ability to do so and get insurance is compromised by the federal government's position.”

Ann Toney, a lawyer in private practice in Denver who said about half of her clients are involved in medical marijuana businesses, said she also was canceled by Hanover last year, but was able to obtain other coverage from Schaumburg, Ill.-based Zurich North America.

A spokeswoman for Zurich said only that the insurer considers its clients' needs “on an individual basis.”

Lloyd's of London, which sources said provides professional liability coverage for the medical marijuana industry, declined comment.

“Our view is this is an underwriting issue, which as always, includes an evaluation of exposures presented by the areas in which a particular law firm provides coverage,” a Hanover spokeswoman said in an email. “At this time, there is a considerable amount of uncertainty in this practice area given the apparent differences between state and federal laws. Therefore, we would not write a new policy, or renew an existing one, for a firm if we knew they were engaged in the practice. However, we do not specifically exclude coverage for the area of practice.”

Both attorneys said they never had a claim involving their medical marijuana clients.

However, Ms. Bricken said she could see some issues involving enforcement of contracts that accountants, lawyers and other professionals enter into with medical and recreational marijuana businesses since it is illegal to contract for illegal activity.

“I could see a judge making the logical leap that ... you are conspiring to violate the Controlled Substances Act,” she said.

Hank Levy, a certified public accountant in Oakland, Calif., said he has been subpoenaed in a case where federal authorities shut down a client following an Internal Revenue Service audit.

“We got subpoenaed for providing banking advice,” he said. However, “the case went away” after prosecutors determined Mr. Levy's firm had merely prepared the medical marijuana dispensary's tax return. “Everybody's got to file a tax return, even if you're in an illegal business.”

However, Section 280E of the Internal Revenue Code disallows many business expenses associated with medical marijuana businesses, said Jim Marty, owner of Longmont, Colo.-based certified public accounting firm Jim Marty & Associates L.L.C., who has been involved in about a dozen audits involving medical marijuana businesses. “What is clearly deductible is the cost of goods sold, but the retail operation is not,” he said.

To avoid professional liability issues, Mr. Marty and others recommend that accountants, lawyers and other professionals make it clear to their medical marijuana business clients that while they may be operating legally under state law, they could still be charged with violating federal law.

“I remind them that ... even if it's legal in the state of Washington, they're still trafficking in a (Schedule I controlled) substance under federal law,” said Dean Guske, president of Bellevue, Wash.-based CPA Guske & Co.

To be extra cautious, Ms. Bricken advises professionals to “vet these people incredibly carefully because of the nature of the business and where the majority of them came from: the black market. Abiding by the law is not first-nature for these individuals. You're dealing in all-cash. You're dealing with people who don't always tell the truth.”

Indeed, Mr. Guske said he has turned away clients that he didn't think would comply with federal tax law or state laws governing medical marijuana.

Sarah Veysey contributed to this story.

 



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