Risk Management

Get it in writing

Rejection of liquor liability coverage needs to be documented

By Donald S. Malecki, CPCU

Having identified that the business involves a liquor exposure, the next step is to suggest that coverage for this exposure be purchased, since it is commonly excluded by CGL.… The offer needs to be in writing since many prospects, when learning what liquor liability insurance costs, will probably reject it.

In the last six months, two insurance agents are known to have been named as defendants in litigation over liquor-related motor vehicle accidents where the disputes were over the lack of proper coverage. How many other agents are confronted with a similar predicament is not known, but a fair guess is that there are many such actions today.

Let’s face it. It is now a fact of insurance business life that whenever a consumer is confronted with the prospect of having to assume a large loss, instead of being able to transfer it to an insurer, the insurance agent will be brought into the matter.

Whatever the relationship may have been between purchasers of insurance and their agents, it usually sours whenever insureds learn they may have to pay claims out of their own pockets. Unfortunately, and in many cases, there is not much an insurance agent can do to avoid being named in a suit.

What certainly would knock the wind out of any such argument, however, is when an agent can produce proof that a consumer was given the opportunity to purchase certain coverage, but it was turned down. Realistically, this is not always possible in every instance, but it is always possible when writing enterprises engaged in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages, since it is such an obvious and natural exposure.

The common trap

It usually takes no great effort to identify whether or not some business owner or operator is in the liquor business. A visit to the location, the description of the business activity on an application, or a telephone call broaching the question is all that is necessary.

Having identified that the business involves a liquor exposure, the next step is to suggest that coverage for this exposure be purchased, since it is commonly excluded by commercial general liability policies. This may take a little more effort on the agent’s part. The offer needs to be in writing because many prospects, will probably reject it when they learn what liquor liability insurance costs. Unfortunately, the next time the subject may be raised is when the business owner or operator is confronted with a liquor-related incident. It is not unheard of, at this stage, for those confronted with litigation to accuse their agents of not having pointed out the need for liquor liability coverage.

A common trap occurs when a new insurance agent takes over an account and a liquor exposure is not revisited. The existing commercial general liability policy excluding the liquor exclusion is simply rewritten with another insurer and the liquor exposure either is overlooked or assumed to have been addressed by the former agent. When this happens, and if litigation were to follow, it can be expected that the insurance agent not only will be named as a defendant, but also will have to spend a considerable amount of nonproductive time proving his or her innocence.

A case in point

This undoubtedly is what confronted the agent in the recent case of Saylab v. Don Juan Restaurant, Inc., et al., 332 F.Supp.2d 134 (U.S. Dist. Ct. Dist. Of Columbia 2004), where the consumption of liquor preceded an auto accident involving two deaths.

Although this case was somewhat long and complicated, it does contain some points that are common to these types of actions. There is nothing better than learning from someone else’s mistakes rather than making your own.

The restaurant in question was acquired in 1994 following the death of its owner. The new owners had no experience in operating a restaurant and purportedly had little ability to read or write English. What these new owners did was to merely continue the existing commercial general liability policy that was in place.

The restaurant owners testified that they did not have any discussions with their broker about insurance coverage or the lack of such coverage until after this lawsuit had occurred.

What brought about this litigation four years after this business was purchased by its current owners is that, after having been served alcoholic beverage at the restaurant, the customer drove his car on the wrong side of a highway and collided head-on with a vehicle carrying four occupants, killing two.

The suit not only named the restaurant owners but also their insurance broker for not apprising them of the availability of liquor liability coverage.

Referred to by the court in this case as a “somewhat murkier issue” was whether the broker owed the insured a specific contract or tort duty to inform the restaurant about the existence of liquor liability coverage. It was conceded here that the broker was under no express contractual obligation to notify the restaurant owner about liquor liability insurance.

Nonetheless, it could not be resolved for purposes of this summary judgment whether the broker was entirely blameless. According to the court, a genuine issue of material fact existed as to whether a prudent insurance agent or broker would have informed the owner about the availability of liquor liability coverage. The issues dealing with the broker were remanded.

What was resolved, however, was that (1) the commercial general liability policy clearly excluded the liquor liability exposure of this restaurant and (2) the CGL insurer was not legally responsible for any negligence allegedly committed by the insurance broker in failing to advise the restaurant owner about liquor liability insurance.

Some predictable arguments

The usual argument against a broker or agent is that if there is no coverage, it is the agent’s or broker’s fault. (This was the subject of my article on the new morality of the insurance buying public which appeared in the January 1996 issue of this publication.)

As a matter of interest, the usual arguments against insurers raised by owners and operators of restaurants, bars, and similar establishments sued for liquor liability in the absence of special coverage are:

• The classification of the business for purposes of establishing the appropriate rate and premium on the CGL policy takes into consideration sales and alcoholic beverages.

This was the argument in the above Saylab case where the policy’s schedule described the premises and operations as “Code 16816—Restaurants—With Sales of Alcoholic Beverages That Are Less Than 75% of the Total Annual Receipts of the Restaurants—Without Dance Floor.”

An insurer’s usual and successful counterpoint is that when a business is classified for liability purposes as a restaurant with a certain percentage of liquor sales, the rate used to determine the premium contemplates the liquor consumption exposure but only for purposes of the premises and operations liability exposure, that is, the propensity of patrons to slip and fall on the premises or be injured through accidental spills and the like.

• Alcoholic beverages are considered to be a product of the business. Products liability coverage is automatically provided by the CGL policy and unless specifically excluded by endorsement, coverage is unaffected by any liquor liability exclusion.

Admittedly, liquor is a product of the business. The root or cause of injury, however, commonly is not a defect or deficiency of the liquor product, but rather a person’s consuming too much of it. The court in the Saylab case held that products liability coverage did not “trump” the liquor liability exclusion.

• The endorsement commonly attached to businesses that sell food and beverages for consumption on and away from the business premises, Products/Completed Operations Redefined CG 24 07, creates an ambiguity in relation to the liquor liability exclusion.

The purpose for this endorsement is to redefine the policy’s definition of the “products-completed operations hazard” to encompass not only bodily injury or property damage that occurs away from the named insured’s premises, after the product has been relinquished to others, but also bodily injury or property damage that occurs on the named insured’s premises, after the product has been relinquished to others.

The insured’s argument in the above Saylab case was that the endorsement provided coverage for all bodily injury and property damage arising out of the restaurant’s sale of alcohol. The court stated that under this theory, the liquor liability exclusion was meaningless. Actually, there is an arsenal of cases that insurers commonly rely on to disprove an insured’s usual argument over this issue.

Conclusion

In the final analysis, the liquor liability exclusion contained in the CGL policy of the restaurant in the above Saylab case was found to be valid and enforceable despite the usual arguments attempting to trump it. Between the time of the accident in 1998 to the court’s decision in 2004, it took six years to resolve this matter. It most assuredly involved a lot of time and expense—from the broker’s perspective, time relegated to depositions and court appearances that could have been better spent on selling insurance.

Granted there is justification for agents and brokers to serve insureds’ interests as order takers. For one thing, a higher standard of care is required to conduct one’s business as an advisor. But agents are playing with fire when they simply write coverages as they have been in the past, assuming that certain coverages have been rejected in the past.

When it comes to businesses involved in distributing, selling, serving or furnishing alcoholic beverages, an inquiry should be made about the liquor liability exclusion and whether special coverage is desired. After all, there is additional commission for its sale. If coverage is rejected, there needs to be a written record. This may serve as a valuable item of proof to complement a motion to dismiss and avoid all the headaches that go with long and time-consuming litigation. *