RISK MANAGEMENT

By Donald S. Malecki, CPCU

DON'T LET CLIENTS GAMBLE
WITH LIQUOR LIABILITY

Be proactive about discussing this exposure with clients

The proprietor of a bed and breakfast asked whether he was required to obtain liquor liability insurance because he placed a bottle of wine in the rooms of "regular" invitees. While this gesture appears innocent enough, it actually is a question for a lawyer rather than an insurance agent, broker, or consultant, because the answer hinges on a question of law. In fact, it also makes good risk management sense to refer the matter to a lawyer. Once the producer or consultant knows the answer to that legal question, it becomes much easier to advise the client on the applicability of liquor liability insurance.

Unfortunately, some potential clients for liquor liability insurance never ask whether this coverage is even necessary. If the producer or consultant does not raise the subject, these prospects may never learn of the coverage's existence until they are confronted with a legal action involving an alcohol-related injury or death.

Some business owners and operators practice the "head-in-the-sand" routine of not wanting to hear about the need for liquor liability insurance. From their perspective, it is too costly even to consider. Some producers understand this problem, particularly those who have recommended the coverage, received a verbal rejection and, without documentation to prove otherwise, have later been sued for failing to inform their clients about the need for this coverage.

Those liquor liability prospects who forgo the purchase of insurance are gamblers and play the odds of encountering a legal action alleging their liability for an alcohol-related incident. They rationalize that if they exercise care in whom they serve and how much, they are less likely to be confronted with such an action than if they do not exercise such care. This is a commendable risk management step, but it has its weak links, particularly when the establishment has many servers, serves more alcohol than food, and has a mixed clientele more interested in beverages than food.

Seeking a defense

Were the need for liquor liability insurance contingent solely on violations of statute, ordinance, or regulation, there would likely be more gamblers and fewer purchasers of this coverage, because the laws of states vary. What complicates matters, however, is that business liability policies commonly exclude bodily injury and property damage for which an insured may be held liable by reason of (1) causing or contributing to a person's intoxication or (2) the furnishing of such beverages to a person (a) under the legal drinking age or (b) under the influence of alcohol.

Business owners and operators who have sought a defense when confronted with a summons and complaint and who have no proof of liquor liability insurance often look to the business liability policy's exception to this exclusion. This exception states that the exclusion does not apply if the named insured is not in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages. The intent of this exception is to provide what is commonly referred to as host liquor liability coverage.

The bed and breakfast scenario described earlier appears to be safe, because its primary business is lodging, with one meal and no liquor service. (This may not be the case for all such businesses.) Considering the cost of liquor liability insurance, perhaps underwriters could provide some coverage for these kinds of incidental exposures at an affordable cost.

The defense of some businesses that are candidates for liquor liability insurance, however, is to rationalize that because they sell other products and/or services in addition to alcoholic beverages, they cannot be "in the business of" manufacturing, distributing, selling, serving, or furnishing alcoholic beverages and, therefore, are not within the scope of the liquor exclusion.

The owners and operators of nonprofit clubs, as a category, appear to be notorious for rationalizing that they do not need liquor liability insurance. The reason for this complacency is that a number of such organizations have been sued and have been able to circumvent the liquor liability exclusion.

In the old case of Laconia Rod & Gun Club v. Hartford Accident & Indemnity Co, 459 A.2d 249 (N.H. 1983), the club was granted liquor liability coverage despite the business liability policy's exclusion because the word "business" was considered to be ambiguous. In one sense, the court said, this word could mean "any regular activity that occupies one's time and attention, with or without a direct profit motive." In another sense, it means "an activity with a direct profit motive."

Another case where a nonprofit veterans organization was able to obtain liquor liability coverage even though it had a license to sell such beverages is Newell-Blais Post 443, Veterans of Foreign Wars of the U.S., Inc. v. The Shelby Mutual Insurance Company, 487 N.E.2d 1371 (Mass. 1986).

ISO endorsement limits coverage

To forestall these kinds of cases, ISO introduced an endorsement in 1990 titled "Amendment of Liquor Liability Exclusion CG 21 50." This endorsement replaces the business liability policy's exclusion so coverage applies only when the named insured (1) manufactures, sells, or distributes alcoholic beverages, (2) serves or furnishes alcoholic beverages for a charge whether or not such activity (a) requires a license, or (b) is for the purpose of financial gain or livelihood, or (3) serves or furnishes alcoholic beverages without a charge, if a license is required for such activity.

Under the description of additional optional endorsements in ISO's Commercial Lines Manual (CLM), this endorsement is described as having the intent of avoiding reference to "in the business of" and hence preventing the granting of coverage in the kinds of cases mentioned above. A similar endorsement, CG 29 52, is applicable to the Products-Completed Operations coverage part.

The fact that the CLM rule does not earmark the amendatory endorsements solely with respect to nonprofit clubs should be viewed as a red flag, because it means that these endorsements could conceivably be broad enough to preclude coverage where, for example, beer is served at a company picnic reserved solely for employees and their families. It could even be broad enough to include the bed and breakfast mentioned earlier.

Another similar ISO endorsement contains the same exclusion as the foregoing CG 21 50 but permits exceptions for scheduled activities. It is titled "Amendment of Liquor Liability Exclusion--Exception For Scheduled Activities CG 21 51."

Fortunately for some liquor business owners and operators, these amendatory endorsements, which have been available for well over a decade, apparently are not widely relied on by underwriters, given that cases involving nonprofit clubs continue to be decided in favor of the defendants. Interestingly, however, the tide may be turning to the point where it may be unnecessary to issue these endorsements for nonprofit or social clubs.

This opinion is based in part on the recent case of Auto Owners (Mutual) Insurance Company v. Sugar Creek Memorial Post No. 3976, Veterans of Foreign Wars of the U.S., Inc., et al., 123 S.W.3d 183 (Mo. App. W.D. 2003), where the court ruled against coverage. The VFW in this case was said to have operated a bar since 1975 that was open to the public and purportedly had gross revenue of $5,000 per month. While it maintained a CGL policy, the VFW did not purchase a liquor liability policy. One allegation made after the vehicle-related deaths of two persons was that the establishment did not take any steps to prevent the accident, such as taking the person who caused the accident home or preventing him from driving his auto.

In considering its decision, the court looked at the above noted cases, holding the phrase "in the business of" to be ambiguous, but was not convinced of the courts' rationale in these cases. The court instead looked at a line of cases that held against coverage: Sprangers v. Greatway Insurance Co., 514 N.W.2d 1 (Wis. 1994),which also involved a VFW that operated a bar open to the public three days a week; McGriff v. United States Fire Insurance Co., 436 N.W. 2d 859 (So. Dak. 1989); and Cormier v. Travelers Insurance Co., 618 So.2d 1185 (La Ct. App. 1993). Also cited was Fraternal Order of Eagles, Cle El um Aerie No. 649 v. General Accident Insurance Co. of America, 792 P.2d 178 (Wash. 1990), where the court focused on the activities of the insured rather than on its corporate structure. In Grain Dealers Mutual Insurance Co. v. Lower 979 F.2d 4 (10th Cir. 1992), applying Oklahoma law, the court adopted the reasoning of the McGriff and F.O.E. decisions. It was the opinion of the Missouri court in the above cited Auto Owners case that when determining whether a liquor-related liability is excluded from coverage, the focus of the analysis should be on the activities of the insured and the risks inherent in those activities, rather than on its business structure.

Given the activities of the VFW, the court went on to say that a reasonable person would have understood that the VFW would have known that it was in the business of selling and serving alcoholic beverages.

Fighting, not switching

It is astonishing to learn just how many clubs, particularly those that cater to war veterans, would rather fight the liquor liability issue than switch to insurance. Of course, liquor liability insurance is not cheap; and when a business's loss history is nothing to brag about, the cost may be prohibitive.

It appears that the odds are against clubs (veterans or otherwise) that sell liquor and forgo the purchase of insurance. The majority of cases holding against coverage of liquor-related claims and suits against nonprofit clubs should serve as a clear warning that it will likely be an uphill battle to obtain coverage, based on the CGL policy's exception to the liquor liability exclusion. Given the seriousness of these kinds of incidents, clubs that choose not to purchase insurance appear to be risking a lot, not only for damages but also for court costs and attorney fees.

Insurance agents, brokers, and consultants do not need to be concerned about whether clubs wish to forgo the purchase of liquor liability insurance, despite the cases demonstrating the odds. Instead, they should focus on the impact for all businesses and organizations of underwriters deciding to issue the previously described Amendment of Liquor Liability Exclusion CG 21 50. Issuing this overly broad amendatory endorsement can virtually wipe out host liquor liability coverage in some instances!

Agents and brokers must walk a fine line here because they should not sell coverage that is not necessary. When an amendatory endorsement is issued, however, the producer should question its issuance in light of ISO's stated purpose in introducing it. If the endorsement cannot be deleted, the client should be warned in writing of the possible repercussions of serving or selling liquor at social functions and should be told about the way to avoid the assumption of costly claims. *

The author

Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.

Those liquor liability prospects who forgo the purchase of insurance are gamblers and play the odds of encountering a legal action alleging their liability for an alcohol-related incident.