What is liquor liability insurance?

What is liquor liability insurance? | Insurance Business America

What is liquor liability insurance?

Liquor liability insurance protects businesses that manufacture, serve, or sell alcohol. The policy provides coverage for legal fees, settlements, and medical costs associated with bodily injury or property damage caused by an intoxicated person, who was served or sold liquor by the policyholder.

The types of businesses that typically need a liquor liability insurance policy include: bars, breweries, restaurants, liquor stores, convenience stores, wineries, grocery stores, and so on. Any business that sells alcohol, regardless of size, is exposed to liquor liability and could benefit from purchasing insurance. Sometimes, businesses are legally required to get this coverage before they will be given a liquor license or a commercial lease.

Liquor liability and dram shop laws
Liquor liability insurance is particularly important for businesses in states with dram shop laws. These laws, named after establishments in 18th century England that sold gin by the spoonful, otherwise known as the dram, are present in 44 states and the District of Columbia. They hold businesses liable for the actions of intoxicated individuals who were served or sold alcohol at their establishment. They enable third-party victims to file civil lawsuits against the establishment that sold or served the liquor, as well as bring a suit against the impaired individual. If successful, they may be able to get damages from both parties under this law.

Dram shop laws are enacted on the state level, not by federal government. The scope of the laws varies quite significantly between states, so it’s important for policyholders with establishments across multiple states to ensure compliance in each region. According to FindLaw, there is one commonality between the state-enacted dram shop laws, which is: “the application of the ‘obvious intoxication test,’ where a retailer knew or should have known that the patron was so intoxicated that more alcohol would cause danger to himself or to others.”

However, the legal advice website also stated: “But proving fault of the alcohol vendor is a relatively difficult task. For example, how do bartenders know whether a patron is drinking on an empty stomach, has a low tolerance or was intoxicated before entering the establishment?”

The visible or noticeable intoxication test under dram shop laws revolves around quite a “subjective standard,” according to Tom Gillingham, owner and CEO of EverGuard Insurance Services, which provides specialty insurance and service for restaurants, pubs, casinos and other hospitality businesses serving alcoholic beverages. He said: “It doesn’t necessarily correlate well to blood alcohol level either. A seasoned drinker often can have a very high blood alcohol concentration, be legally impaired, but function relatively normally to the naked eye, whereas somebody who doesn’t drink frequently could have one or two drinks and have a difficult time with their speech or holding their composure. That’s the tough part of the business.”

Liquor liability vs. host liquor liability
Liquor liability insurance is not to be confused with host liquor liability insurance, which the IRMI describes as: “liability for bodily injury or property damage arising out of the serving or distribution of alcoholic beverages by a party not engaged in this activity as a business enterprise.” Most host liquor liability exposures – for companies that are hosting a social event like a party – can be included in a general liability policy. The same is not true for commercial enterprises involved in the liquor trade. Liquor liability coverage is almost always excluded from commercial general liability insurance policies, meaning companies should look at buying a stand-alone policy or a coverage endorsement.

Similar to dram shop laws, hosts of private functions where liquor is served can be sued under social host liability laws. These laws hold the hosts of private functions liable for injuries or death caused by their negligence in serving alcohol and/or failing to prevent an impaired guest from driving.

Drunk driving
Businesses that sell or serve alcohol are obliged by law to stop serving alcohol to patrons who they believe might be gearing up to drive over the legal blood alcohol driving limit. If they take no action and a patron gets into a drunk driving accident, they can be held liable.  Gillingham told Insurance Business: “Even the best hospitality operators in the business face the risk of people getting intoxicated and then driving cars. You can underwrite them to death and select only the finest operators but it’s just a sad fact of the business that you’re going to see some amount of alcohol-related automobile accidents and fatalities, so that makes it difficult.”

Mitigating liquor liability risk
It’s challenging, but there are ways for businesses to mitigate their liquor liability risks. They can:

  • Send servers to training and education courses
  • Encourage customers not to become intoxicated
  • Promote the availability of non-alcoholic beverages
  • Ask a patron to take a breathalyser test if there’s concern that they’re over the limit for driving
  • Encourage patrons to take alternate transportation, like a taxi or rideshare service

“Loss control techniques are really important right down to an account level. There are lots of nuances in state laws and even in the character of specific city neighborhoods. If a bartender misjudges a situation with a patron, the ensuing lawsuits are typically not in favor of the bar,” Gillingham noted. “A lot of these cases are very tragic. People are getting badly injured and killed - sometimes at absolutely no fault of their own - and if you were the last bar to serve that customer a drink, their blood alcohol level was in excess of the legal limit and they had any sort of visible signs of intoxication, then it’s a difficult case to win.”