Dealing with the legal and financial mess
that results from absent coverage
If there was no option to secure the coverage via buy back, it may
have been wiser (and fairer) to decline writing a CUP.
By Bruce D. Hicks, CPCU, CLU
The Court Decisions column is a popular part of Rough Notes magazine. One reason for this is that the court room is where the promises made in an insurance contract often 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 mental exercises. This column comes from the industry expert contributors to Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from The Rough Notes Company’s digital solutions. The contributors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions and/or offer broader perspectives.
The restaurant business has always been challenging to properly insure, especially when covering those that also serve alcoholic beverages to their customers. Besides handling typically significant exposures such as harm to others from food poisoning/allergies, high traffic from customers (slips, falls, etc.), crime, equipment breakdown, business interruption and property, there is also the huge loss potential from liquor liability.
Liquor liability is at the heart of this column’s discussion. A couple of affiliated businesses (a restaurant and a bar) were caught up in a tragic loss. A customer visited both establishments and was served alcohol. In fact, he was served far more than he should have been.
After leaving the second establishment, he traveled the wrong way on a nearby highway and was in a collision with another vehicle.
The inebriated customer lost his life and also killed all five occupants of the other vehicle. You may expect that some conflict arose shortly after the tragedy. Your expectation is correct, but it occurred in a different manner than expected.
The businesses, referred to as Roosters in the court case summary, held both a businessowners policy (BOP) and a commercial umbrella policy (CUP) from Grange Insurance. With critical financial assistance from their BOP, Roosters settled the loss after being sued by the deceased accident victims’ estates. However, no coverage was available under the CUP.
After litigation, including appeals, Roosters was unable to secure umbrella coverage for the loss. As it turns out, the CUP was modified by an endorsement with wording that excluded losses involving liquor liability. Understandably, Roosters and Grange battled over this situation with the courts, eventually finding that the endorsement wording clearly controlled how the CUP operated.
As modified, the umbrella was not obligated to respond to the loss.
However, this strikes us as a curious matter. Is that the outcome intended by any of the parties involved? While that question was not addressed in the court records, we are free to speculate. Give it a moment. How would you hope this to have panned out?
Well, it would, by far, have been preferable that such a terrible, fatal accident never occurred. However, since it did take place, perhaps the best outcome would have meant that both the BOP and the CUP had responded to the loss, without delay or litigation.
What coverage was sought by Roosters?
The affiliated businesses purchased a BOP with a limit of $1 million and then a CUP with an excess amount of several million. It appears they intended to secure millions of dollars of liability protection.
Certainly, they were aware of the risks they faced from serving alcoholic drinks to the public. They also litigated the issue to the appellate level to fight the exclusion’s applicability. It would appear their expectation was that liquor liability was provided under both the BOP and the CUP.
If they expected such coverage under both their primary and excess policies, why were they unaware of its being limited to their BOP? Was that fact missed by the businesses as well as their agent?
Why was this endorsement missed by agent and insured?
A simple act could’ve avoided the legal and financial mess that resulted from the absent coverage. Either Roosters’ management or ownership should have held the responsibility for checking policies to assure that desired protection existed. If it was an oversight, it could have been addressed quickly by enlisting their agent’s help to correct the CUP (by removing the endorsement).
If it turns out that the insurer had a firm intent to issue the CUP as endorsed, coverage should have been sought from another insurer.
Hopefully Roosters, if it survived the loss, will put safeguards in place to assure receipt of the precise coverage it seeks. Of course, their loss history will now make it more difficult to do so.
Another step that should be taken by Roosters is to revisit the effectiveness of employee training. There are various sources of alcohol server training and/or certification that businesses could find invaluable such as TIPS, online training or applicable state programs.
Many businesses that serve alcohol have also developed protocols to discontinue services as well as offering taxi/rider services to customers who may be impaired.
What was the rationale for the CUP liquor liability exclusion from the insurer’s side?
Assuming that Grange’s default issuance of their CUP is without their liquor liability exclusion, there must be a reason for the endorsement.
Did it have to do with pricing? Perhaps the class of business was considered underpriced for an unendorsed umbrella, and removing the exclusion came down to a sort of coverage buy back.
Was it an underwriting decision in response to Roosters having a less-than-ideal loss history? Was there evidence of previous incidents of over-serving? Further, was it sufficient to merely rely on an endorsement’s opening precaution that it should be read carefully for changes in coverage, especially since its use resulted in the loss of key coverage?
While Grange may well have been justified in deciding to use the exclusion, was the business well-served by their decision? If there was no option to secure the coverage via buy back, it might have been wiser (and fairer) to decline writing a CUP. Roosters could then seek coverage elsewhere.
If no insurer is open to affordably offering a single excess layer, perhaps an option may be to spread multiple layers of excess coverage among more than one insurer.
The author
Bruce D. Hicks, CPCU, CLU, is an Indiana-based insurance coverage expert. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010 and most recently served on its International Interest Group Committee and as Chair of its Publications Committee.
