Dig a Little Deeper
By Linda Ferguson, CPCU
FILLING GAPS IN LIQUOR LIABILITY COVERAGE
Endorsements can protect your nonprofit clients
The Court Decisions feature of Rough Notes magazine and Court Cases in the PF&M Analysis, a publication of The Rough Notes Company, are popular with our readers. One reason is that the courtroom is where the promises made in an insurance contract become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mere mental exercises. In this column, the editors of PF&M are going to dig a little deeper into a court case to identify a coverage problem and then provide possible solutions.
Liquor liability exposures are more widespread than you might realize. It’s not just bars and taverns that have to worry.
Mutual Service Casualty Insurance Company v. Wilson Township and Spranger v. Greatway Ins. Co. et al. are two classic liquor liability cases. In both cases a tragic drunk driving accident occurred and the entity that provided the alcohol to the driver was a nonprofit organization. When the injured parties and the estates of those killed sued the nonprofits for their roles in providing the alcohol to drunk drivers, both turned to their commercial general liability (CGL) carriers. Both carriers declined coverage because of wording similar to the following language that is similar to older ISO wording:
“Bodily injury” or “property damage” for which any insured may be held liable by reason of:
(1) Causing or contributing to the intoxication of any person;
(2) The furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or
(3) Any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.
However, this exclusion applies only if you are in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages.
The nonprofits objected strenuously and argued that they were subject to the exception because they were nonprofits and their business was to provide the services in their charter.
The two cases diverge because of the activities of each nonprofit.
In Mutual Service v. Wilson, the named insured was a fire department and the activity during which alcohol was served was a one-day fundraiser. Wilson had obtained a liquor license for the special event and also purchased liquor liability coverage. Liquor was sold only during this event, and the remainder of the time Wilson operated solely as a township fire department.
Spranger v. Greatway involved a Veterans of Foreign Wars post. This post’s bar was open to the
public at least three days a week, and at the time of the accident six bartenders and two other persons were employed at the post to serve alcoholic beverages at a price. The post held a liquor license and was a member of the Tavern League of Wisconsin. It paid state sales tax and was subject to federal income tax for income derived from its bar.
Liquor liability exposures can be difficult to navigate, but solutions are available.
In the Wilson case the insured was determined to be subject to the exception and therefore covered because the insured was “not in the business.” In the Spranger case the insured was not subject to the exception and not covered because it was “in the business.”
The current CGL exclusion is similar to the above, so the “in the business” confusion remains.
One way to prevent the confusion is to consider using the CG 21 50–Amendment of Liquor Liability Exclusion, which eliminates the exception wording and adds the following in its place:
This exclusion applies only if you:
(1) Manufacture, sell or distribute alcoholic beverages;
(2) Serve or furnish alcoholic beverages for a charge whether or not such activity:
(a) Requires a license;
(b) Is for the purpose of financial gain or livelihood;
(3) Serve or furnish alcoholic beverages without a charge, if a license is required for such activity; or
(4) Permit any person to bring any alcoholic beverages on your premises, for consumption on your premises.
This is very specific as to the activities and licensure requirement, but item (4) could result in a gap in coverage because the CG 00 33–Liquor Liability Coverage Form covers only “if liability for such ‘injury’ is imposed on the insured by reason of the selling, serving or furnishing of any alcoholic beverage.”
As an example, the River City Garden Club holds an annual event to raise funds for River City’s beautification projects. Its CGL carrier insists on CG 21 50 being attached because of the event, so the Garden Club purchases a CG 00 33 to cover its liquor liability. In addition to this annual event, the Garden Club holds monthly meetings. No alcohol is served, but many members bring and share their own wine. The club furnishes goblets, napkins and hors d’oeuvre. When Molly doesn’t quite navigate her way home from one monthly meeting, resulting in a serious car accident, the Garden Club is sued. The club turns to its CGL carrier but is turned down because of item (4) in the CG 21 50. It then turns to its liquor liability carrier, and coverage is again declined because the club did not sell, serve or furnish an alcoholic beverage.
The good news is that ISO anticipated this problem and has a possible solution for each kind of policy.
Coverage in the CGL may be expanded. The CG 21 50–Amendment of Liquor Liability Exclusion—Exception for Scheduled Premises or Activities can be attached, and the monthly Garden Club meetings can be described as an excepted activity. The other approach is to expand the coverage in the CG 00 33 by attaching CG 24 06–Liquor Liability–Bring Your Own Alcohol Establishments, which adds the following wording to the insuring agreement: “An insured who permits any person to bring any alcoholic beverage on their premises, for consumption on the premises, whether or not a fee is charged for such activity, will also be considered selling, serving or furnishing alcoholic beverages.”
Liquor liability exposures can be difficult to navigate, but solutions are available.
The author
Linda D. Ferguson, CPCU, is a seasoned insurance product and coverage expert with more than 45 years of experience in the industry.
