Liquor And The ISO Commercial General Liability Coverage Forms

LIQUOR AND THE ISO COMMERCIAL GENERAL LIABILITY COVERAGE FORMS

(April 2019)

 

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INTRODUCTION

The liquor liability exclusion is unusual because it applies to only certain types of businesses. It often applies to vicarious situations where another person causes the injury. The allegations are that the liquor-related business caused or contributed to the inebriated state of the person who caused the accident and that the accident would not have happened without the liquor-related business’ negligence.

This article analyzes the liquor exclusion, liquor coverage, and the two major changes in the 04 13 edition of the Insurance Services Office (ISO) Commercial General Liability (CGL) Coverage Forms that address the liquor liability exclusion.

LIQUOR LIABILITY EXCLUSION

The Liquor Liability exclusion in the ISO CGL Coverage Forms states that coverage does not apply to bodily injury or property damage that is any insured’s liability because of any of the following:

Any of the actions described above may result in an occurrence. In that case, there is also no coverage if any of the following claims related to that occurrence are brought against the insured:

This exclusion does not apply if the named insured is not in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.

The named insured may not serve alcoholic beverages, but it may allow others to bring such beverages onto its premises. In that case, this exclusion does not apply even if a license is required to operate this way. It is not considered a liquor-related business even if a fee is charged for the beverage to be consumed on the premises.

Note: This exclusion does not apply to host liquor situations, if the insured is not in one of these liquor businesses. As a result, coverage applies to the insured's business lunches, parties, and other social functions where alcoholic beverages are served.

 

Examples:

None of the following are subject to the Liquor Liability Exclusion:

  • Archie's Artwork and Crafts is a small retail store that specializes in handcrafted artwork. Archie hosts a wine and cheese party to celebrate its first anniversary of being in business. Attendance is by invitation only and guests are not charged for participating.
  • Adam and Eve's Anatomy Equipment is a medical equipment distributor. One of its marketing people takes a client to lunch and pays for a round of beers.
  • Penelope's Publishing wants to show her appreciation to her employees for their hard work. She hosts a sit-down dinner, complete with wine and other alcoholic beverages.
  • Casey's Computers is a computer software company. It gives cases of imported beer to its larger clients during the Christmas season to thank them for their business.
  • Willie's Wood Works sponsors a fund-raiser where it provides food and alcoholic beverages for a charge.
  • Tea and Company is a popular luncheon restaurant located in a dry county. Private parties are often held at the restaurant. On many occasions the party hostess supplies a variety of wines for the guests to enjoy.

CHANGES TO THE LIQUOR LIABILITY EXCLUSION

The 04 13 edition of the CGL Coverage Forms introduces two new parts. One has negative connotations for the insured while the other appears to reduce potential ambiguity for both the insured and the insurance company.

1. Coverage is denied when there is an occurrence and it is alleged that the insured’s negligence, not the liquor, caused the injury. This allegation is an attempt to bypass the liquor liability exclusion. This added wording explains that there is still no coverage when the negligence is for either of the following. This wording is placed within the liquor liability exclusion because the allegations are interrelated.

 

Example: Patty hires Jerry to be a bartender. She does not conduct a background check or contact any of his prior employers. She does not do anything that a prudent employer might be expected to do when hiring a new employee. She hires him for his nice smile and because he fits into the uniform. Jerry overestimates his serving sizes and guests consume twice the normal amount of alcohol in each mixed drink. Carrie, who always has one drink after work, is surprised at her blurred vision on the way home and is equally surprised when she strikes her neighbor’s car and house as she turns into what she thinks is her driveway. The neighbor sues her and brings Patty into the action because she alleges the problem was Patty’s hiring and training practices. Patty may have had coverage under prior editions but there is no coverage with the 04 13 edition.

           

 

Examples: Jerry tells Patty that he believes Marty should not be driving home. Patty knows and likes Marty and does not want to embarrass him because he is a great customer.

Scenario 1: Patty tells Jerry to offer him a cup of coffee but not to take any further action. Marty drives home and strikes and seriously damages an overpass. The city sues Marty for amounts that exceed his liability limits and he brings Patty into the suit, stating that she should have offered him a ride home. Patty may have had coverage under prior editions, but there is no coverage with the 04 13 edition.

Scenario 2: Patty asks Marty’s friend, Carl, to drive Marty home. Carl agrees but they stop along the way for additional libations. Carl causes an accident and Marty is seriously injured. Carl does not have either insurance or a license! Marty sues Patty for his injuries because she arranged for the ride home. Patty may had had coverage under prior editions but there is no coverage with the 04 13 edition.

           

Note: This could be a significant reduction of coverage for certain operations. The liquor liability policy should be examined to verify that it picks up this additional exposure.

 

2. This exclusion has been changed to recognize that some businesses allow alcohol on their premises but do not actually serve or sell alcohol. A question arose as to whether the liquor exclusion would apply to such operations. This revision specifically states that permitting a person to bring alcoholic beverages on the named insured’s premises in order to consume them does not, “by itself” make the operation in the business of selling, serving, or furnishing alcoholic beverages. This applies regardless of whether a license is required, or a fee is charged for that activity.

Note: Carefully consider the phrase “by itself.” It adds uncertainty to this fairly clear statement. It states that there must be additional tests to determine if the operation is in the liquor-related business. However, it does not provide any guidance as to the details of further testing.

 

Example: Patty lost her liquor license due to her lax attitude toward code enforcement. She still enjoys serving customers and opens a new restaurant. She invites all her old customers back but explains that she provides only food, a pleasant atmosphere, and non-alcoholic beverages. The customers must provide their own alcohol. Bob and Becky have a major celebration at the restaurant. They are unable to navigate the entrance to the freeway and crash into the barrier. Their car is totaled, and they are both injured. They sue Patty for allowing them to leave while intoxicated. Because of this new wording, Patty is covered.

 

Note: Patty might also have been covered under prior editions, but the 04 13 edition is much more explicit.

LIQUOR LIABILITY AMENDATORY AND COVERAGE ENDORSEMENTS

There are three endorsements that affect the liquor liability exclusion in the ISO CGL Coverage Forms.

The first two restrict coverage.

CG 21 50–Amendment of Liquor Liability Exclusion

This endorsement excludes liquor liability coverage for parties that furnish liquor with or without a charge who require a license, in addition to parties that manufacture, distribute, or sell liquor. It also excludes liquor-related liability for operations where persons can bring their own alcoholic beverages on the premises and consume them there.

CG 21 51–Amendment of Liquor Liability Exclusion–Exception for Scheduled Premises or Activities

This endorsement modifies the liquor liability exclusion similar to CG 21 50–Amendment of Liquor Liability Exclusion. However, it includes coverage for certain specifically described activities, such as company picnics or year-end parties where alcohol may be provided, or persons may be permitted to bring their own alcoholic beverages to consume.

The third endorsement broadens coverage.

CG 24 08–Liquor Liability

This endorsement removes the Liquor Liability exclusion in the coverage form. The result is that it provides full liquor liability coverage.

SEPARATE LIQUOR LIABILITY COVERAGE VERSUS ENDORSING THE CGL COVERAGE FORM

Endorsing the ISO CGL coverage form to include liquor liability coverage using CG 24 08–Liquor Liability may appear to be the simplest and most practical way to provide liquor liability coverage. However, caution is recommended when doing so. This approach should be used only in cases where both the insurance agent and the insurance company completely understand and are comfortable with the insured's operations and exposures. This is because this approach completely removes the liquor liability exclusion.

This simple approach may not be in the insurance agent or the insured's best interests because there are several potential problems that accompany it that must be considered. For one, combining liquor liability losses with other liability losses on the same coverage form or policy can result in unacceptable loss experience for the entire general liability line of business. This could result in experience and/or schedule debits being applied to all general liability rating. It could also result in an unacceptable loss ratio to the extent that the risk is difficult or impossible to market to very many insurance companies. In addition, it could affect the agent's contingent profit-sharing arrangement with the insurance company.

For these and other reasons, businesses with moderate to high liquor exposures should consider separate liquor liability coverage. CG 24 08–Liquor Liability should be used only on risks that have comparatively minor liability exposures that should not produce losses that adversely affect the pricing, underwriting desirability, or marketing of the risk's general liability exposures. As a result, it is not used often. When it is, insurance companies underwrite the exposures carefully, cautiously, and charge premiums that reflect the exposure. Using it provides complete liquor liability coverage because manufacturing exposures, events where fees or charges are made, or events that involve regulation or licensing are covered. As a result, most insurance companies restrict its use to businesses and operations that have only minimal liquor liability exposures.

LIQUOR LIABILITY COVERAGE FORMS

One of the two ISO Liquor Liability Coverage Forms is used to insure a liquor business's exposures in most cases. CG 00 33 is the occurrence form and CG 00 34 is the claims-made form. The forms are identical except in a few specific areas. Both insure bars, taverns, restaurants, hotels, package liquor stores, and other businesses that sell, serve, or furnish alcoholic beverages to their customers. Both cover injury or damage claims their customers sustain as a result of consuming liquor they were served. Coverage can also be written for the owner, general lessee, or mortgagee of the property these businesses occupy. Both forms fill the gap in coverage due to the CGL exclusion for such businesses.

The liquor liability coverage forms may also be used for named insureds that do not provide alcoholic beverages but do allow customers to bring and consume alcoholic beverages on their premises.

Related Article: CG 00 33 and CG 00 34–Liquor Liability Coverage Forms Analysis

Insureds in the liquor business should consider using one of these coverage forms to insure their liquor exposures. They insure amounts an insured is legally obligated to pay as damages because of injury imposed due to selling, serving, or furnishing alcoholic beverages. The basis for the insured's legal liability varies from state to state and comes from a variety of dram shop, liquor control, or alcoholic beverage laws. While the laws are different, most state that a business that sells or serves liquor is liable for the injury or damage an intoxicated person or one "under the influence" causes if the liquor provider caused or contributed to the person's intoxication.

RELEVANT COURT CASES

Related Court Cases:

Bar Owner’s Negligence Could Not Be Separated from Liquor Liability Exclusion

Can Insurer Duck Liability For Drunk-Driving Deaths?

CGL Policy's Liquor Exclusion Inapplicable To Sales during Festival

Fraternal Organization Found Subject to Liquor Liability Exclusion

Liquor Liability Exclusion Held Applicable To Nonprofit VFW Post

Liquor Liability Exclusion Held To Overcome Coverage for Car Parking

Liquor Liability Suit Based On Failure to Restrain Patron

 

AVAILABLE MARKETS

Insurance agents and brokers that have customers in the liquor business and must place their liquor liability coverage can refer to these sections in The Insurance Marketplace, a publication of The Rough Notes Company, Inc.