Liquor Liability Coverage Forms Underwriting Considerations

LIQUOR LIABILITY COVERAGE FORMS UNDERWRITING CONSIDERATIONS

(November 2019)

INTRODUCTION

Underwriting liquor liability coverage means that underwriting is done at a distance. The action an insured takes or does not take is the trigger to an accident that may or may not occur. Underwriters cannot do anything to lessen the impact of an accident because they do not have a relationship with the person who causes it. The only thing they can do is to try to reduce the chance that the insured will initiate the triggering action.

 

Example: Jon was a surgeon with a young family. While he was driving to work one day, Shirley struck him with her vehicle. She was 18, driving a stolen car, and legally intoxicated. Red's Bar and Grill served her drinks an hour before the accident. Red's was held legally liable for Jon’s injuries because it served an underage driver.

 

The only action an underwriter could have influenced directly was whether or not Shirley was able to obtain a drink at Red’s. Once that first drink was served, Red’s became a party to the accident according to the law, and the insurance company that wrote the coverage became responsible to defend the legal action and to pay.

LIQUOR LICENSES

One of the first underwriting considerations is the type of liquor license the business holds. Neither of the liquor liability coverage forms provides coverage if the establishment does not have the appropriate liquor license. Every state has different rules and requirements concerning issuance of liquor licenses but the following are the most common licenses:

MANUFACTURING

Liquor and alcoholic beverage manufacturers are the farthest removed from consumers of all businesses in the liquor and alcoholic beverage business. As a result, their exposure to liquor liability is lower than other liquor-related businesses. Their primary exposure may be products liability that the Insurance Services Office (ISO) CG 00 01–Commercial General Liability Coverage Form covers, not liquor liability. However, manufacturers may still be involved in situations that require separate liquor liability coverage, such as the following:

Manufacturers engaged in direct sales should be underwritten as an applicant with off-premises consumption. The key element to consider is whether or not their procedures prevent or eliminate cyber sales to underage customers. Simple statements to the effect that underage drinkers are not permitted to purchase alcohol are insufficient. Will they stand up in court? Will they prevent lawsuits and other legal actions? The manufacturer must take responsible and credible actions to ensure that Internet or mail order sales are restricted to adult customers.

DISTRIBUTING AND WHOLESALING

Liquor and alcoholic beverage distributors and wholesalers have liquor liability exposures that fall somewhere between those of manufacturers and package stores. However, their liquor liability exposure is usually comparatively low unless, like manufacturing, they are involved in direct sales to customers by the following:

Direct sales to customers or pickup at the warehouse are important in underwriting, especially if those direct sales involve large volumes of liquor or alcoholic beverages. These customers may be purchasing liquor or alcoholic beverages for underage drinkers, and the distributor may be the only link in the chain of events with available assets to pay for a serious loss.

OFF PREMISES CONSUMPTION ONLY

Businesses that sell liquor and alcoholic beverages for consumption off premises experience losses that are mainly due to having lax and/or inadequate procedures for screening customers. It is best to have strict procedures such as requiring customer identification every time an alcoholic beverage purchase takes place. Underage employees should never be allowed to ring up alcoholic beverage sales because:

The ratio of alcoholic beverage sales to sales of all other products is important. Establishments that have high alcoholic beverage sales ratios usually have greater exposure to loss.

ON PREMISES CONSUMPTION

Businesses that sell liquor and alcoholic beverages for consumption on premises present the greatest exposure to loss. They are more accountable and are held to a higher standard than any other business because they observe their customers in addition to serving them. These businesses must deal with two important conflicts of interest. Their profits depend on sales to a steady stream of regular customers. However, the same elements increase the likelihood that an alcohol or liquor-related loss or incident will take place. As a result, it is both difficult and essential that these businesses balance the risk of customer alienation by refusing to serve customers who are already intoxicated or about to be against the need to increase profits in order to remain in business.

Underwriting businesses like these begins with analyzing the ratio of alcoholic beverage sales to food and non-alcoholic beverage sales. Higher alcoholic beverage sales mean a higher exposure to a liquor liability loss. The underwriting analysis must also evaluate other activities that may occur on the premises to encourage and increase the amount of alcohol consumed. Examples are:

Each of these activities increases the possibility of a loss because customers are encouraged to drink more.

 

Example: Krazees Party Towne is the city's hottest bar. It built its reputation by bringing in excellent local bands and entertainment that caters to the twenty-something crowd that likes to party. One of the most popular bands is known as the Wallbangerz. This dance band brings in a very lively crowd. Krazees’ owner tries to book them at least twice a month because of their wild act and successful array of gimmicks. During each set, the band has a couple of "Banger Beats." These are songs where the customers must order and finish off a popular vodka drink when the song is played and before it ends. The receipts at the end of the night reveal that drink sales soar when this band plays. Needless to say, the number of seriously inebriated customers also soars.

 

On the other hand, activities that encourage consuming food have the opposite effect. Food actually reduces the amount of alcoholic beverages consumed and the possibility of loss because it absorbs some of the alcohol consumed and reduces the level of inebriation and impairment.

Proper training is the key to controlling exposures. Bartenders should keep track of the number of drinks they send to each table to try to prevent excess consumption. Servers must be trained to always request proper identification for everyone they serve. Training by TIPS* or similar groups is the proper way to handle customers and should be required along with establishing a specific set of procedures and adhering to them. Designated driver incentives and arrangements with local taxi companies should also be developed and be available if and when the need arises.

*TIPS is an acronym for Training for Intervention ProcedureS. This is a training program that Health Communications, Inc. offers. Information on TIPS can be found at www.gettips.com.

Loss experience and background information on the business owner is important. A vital piece of information is the status of its liquor license and whether it was ever revoked or suspended.

Related Court Case: Liquor Liability Suit Based on Failure to Restrain Patron Did Not Circumvent Exclusion

SPECIAL EVENTS LICENSES

Special events licenses are issued for specific activities or events where alcohol is served. These events are usually for only a few days or even just a few hours, but the exposure may be greater than the exposure for a regular business operation. Special events are usually characterized by inadequate or complete lack of controls and the event sponsor’s inexperience in handling alcohol-related situations. The key element is control. Loss exposures are minimized when the sponsor arranges for and has enough people to do the following:

Open or self-serve bars should be prohibited. Serving and wait staff should be trained and experienced in dealing with persons that consume alcoholic beverages.

BRING YOUR OWN ALCOHOL ESTABLISHMENTS

Restaurants and other establishments may not actually provide alcohol. However, they can provide an environment where alcohol consumption is not only permitted but is encouraged. They may provide the non-alcoholic set-ups, entertainment, and other furnishings and arrangements for drinking. Underwriting this exposure is difficult because the liability laws are not as explicit as to when licenses are required. It is very important to carefully examine the activities that take place at the establishment, the age of patrons, and hours of operations. It is also very important to determine if the named insured chooses to not serve alcohol or is forced into this activity because its liquor license was revoked.

LIQUOR LIABILITY GRADES

ISO developed a scale for each state that grades the extent of liability it imposes on operations that supply or sell liquor. States that have lower numerical grades means that establishments involved with liquor or alcoholic beverages present lower exposures.

PRICING

Underwriters use their company underwriting guidelines, state grades, and judgment to determine the appropriate premium to charge for a particular risk. Some insurance companies have filed and published rates.

Licenses for special events that involve serving alcoholic beverages are based on specific limited time periods. This is why a judgment rated flat premium charge is usually made instead of using the standard rating formula. This charge should be based on the type of exposure and the state grade.

Related Article: Liquor Liability Coverage Forms Rating Considerations

MANDATORY STATE ENDORSEMENTS

Refer to the Mandatory State Endorsements in the state exception pages of the ISO Commercial Lines Manual (CLM) for any state-specific endorsements that must be included.