What is liquor liability insurance?

How to protect commercial clients that manufacture, serve or sell alcohol

What is liquor liability insurance?


By Bethan Moorcraft

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.”

What is liquor liability coverage in the US?

Liquor liability insurance plays a important role in providing protection for firms involved in the sale, service, or distribution of alcohol within the United States. It serves as a protective shield when situations arise involving intoxicated customers who were served alcohol by the business, leading to bodily injury or property damage and subsequent legal claims.

Businesses have the option to buy liquor liability insurance either as a standalone policy or as an endorsement of their existing general liability coverage.

In the event of a legal dispute, this insurance assumes a pivotal role in shielding the business, covering aspects such as:

  • Legal expenses: Liquor liability insurance alleviates the financial burden by covering legal defense costs, which include attorney fees and court expenses.
  • Settlements and judgments: If the lawsuit results in a settlement or judgment against the business, liquor liability insurance is instrumental in providing the financial resources to meet these obligations.
  • Property restoration expenses: In cases where an intoxicated customer inflicts damage to property, liquor liability insurance steps in to defray the expenses linked to property repairs or replacements.
  • Medical expenditures: When incidents involve bodily injury to individuals, liquor liability insurance helps cover medical costs incurred for treatment.

Liquor liability insurance is an indispensable protective measure for businesses. It helps ensure that businesses have the resources to meet the legal challenges and financial responsibilities stemming from incidents linked to alcohol service to customers.

Why is liquor liability so expensive?

Liquor liability insurance can be expensive due to its complex nature and the factors that underwriters consider when pricing and structuring policies. Key factors include:

1. Type of venue:

The primary purpose of the venue significantly impacts risk.

Restaurants focused on food service are less risky than nightclubs emphasizing entertainment. Bars/taverns fall in between. Concerts, special events, and similar venues charging the public for alcohol also need coverage.

2. Location of venue:

State liquor laws and dram shop laws vary widely, influencing liability standards for alcohol-serving venues.

Tough jurisdiction increases risk and costs, while favorable ones make it harder to prove venue negligence.

3. Percentage of liquor sales:

Higher alcohol sales percentages lead to higher premiums. A restaurant with substantial alcohol sales may be treated as a bar, while bars with dance floors and high liquor sales may be classified as nightclubs.

4. Individual risk traits:

Underwriters examine specific venue characteristics, including entertainment offerings, patronage, proximity to colleges, management experience, loss prevention measures, security arrangements, employee background checks, security-to-patron ratios, staff training, policies for dealing with intoxicated patrons, the presence of minors, security cameras, and more.

What does liquor liability exclusion cover?

The Liquor Liability Exclusion in insurance policies, particularly the standard Insurance Services Office, Inc. (ISO) CGL policy, serves to exclude coverage for entities engaged in alcohol-related activities. It's important to understand the nuances of this exclusion:

Type of business: The exclusion primarily applies to businesses involved in the manufacture, distribution, sale, service, or furnishing of alcoholic beverages. This includes bars, taverns, nightclubs, and any establishments charging the general public for alcohol.

Location matters: Application of the exclusion varies by jurisdiction due to differences in state liquor laws. Some states have stricter liability standards, affecting coverage expectations. Understanding local dram shop laws is crucial.

Percentage of liquor sales: Businesses with higher alcohol sales percentages often face higher premiums. The type of venue can change based on alcohol sales, with restaurants potentially becoming bars or nightclubs.

Individual risk traits: Underwriters consider specific venue characteristics, including entertainment offerings, patron demographics, security measures, employee background checks, staff training, and policies for handling intoxicated patrons.

The exclusion specifically pertains to bodily injury or property damage claims arising from scenarios where the insured:

  • contributes to intoxication
  • serves minors
  • serves individuals already under the influence
  • violates alcohol-related statutes

It applies whether liability arises from statutory laws or common law principles.

While the liquor exclusion is clear for for-profit organizations involved in alcohol sales, courts may limit its scope for nonprofit organizations or businesses not primarily focused on alcohol sales.

An amended liquor liability exclusion, increasingly applied to many policies, broadly excludes coverage for entities involved in the sale or furnishing of alcoholic beverages, whether for profit or not.

This amendment can impact various events and organizations, potentially excluding coverage for activities where alcohol is served for a fee or where a license is required, even if the organization is nonprofit.

A thorough understanding of this amended exclusion is crucial when advising policyholders and assessing coverage for specific events or businesses.

What does liability insurance cover?

Here is the coverage for Liability Insurance, which comes in two types and is broken down as follows:

Bodily Injury liability coverage (BI):

BI coverage helps with medical expenses for individuals injured in accidents where you're at fault. It also assists in covering legal fees if a lawsuit arises from the accident.

Essentially, BI safeguards assets and ensures injured parties' medical bills are paid, while also helping with legal defense costs.

Property Damage liability coverage (PD):

PD coverage handles costs related to repairing or replacing property you damage in accidents for which you're held responsible. For instance, if you damage another vehicle in a collision, PD coverage covers the repair or replacement expenses. This keeps you from bearing the entire cost of repairs or replacement.

These two facets of liability insurance are vital for protecting your financial security and the interests of others in accidents where you're deemed liable.

 BI takes care of the medical and legal aspects of bodily injuries, while PD deals with expenses tied to property damage.

Together, they create a comprehensive safety net for various accident scenarios, ensuring you're financially prepared for the unexpected while fulfilling your responsibility to others involved.


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