Liquor Liability Insurance

“A man walks into a bar. . ..”

Why would I start a discussion about liquor liability insurance (dram shop) with the opening line to a joke? Because given the application of the laws requiring this coverage in many states, you can either laugh about it or you’ll end up crying.

Liquor Liability Insurance

Liquor Legal Insurance is sold to liquor licensees and to individuals who are intending to serve alcohol. In one recent court decision a person who picked up the tab at several bars and restaurants was held liable. When sold to individuals and businesses who don’t sell, serve, or manufacturer alcohol, it is sometimes called Host Liquor Legal Liability Insurance. A homeowner’s policy may or may not include this coverage. A general liability policy may or may not include this coverage for businesses who have incidental Liquor Legal exposures.

Normally the state or local regulatory body will set the amount of coverage a liquor licensee must carry.

Liquor Legal Liability Laws Vary Greatly between the States

I have been involved with the sale of Liquor Liability Insurance on a large scale since the late 70’s. The first thing you need to know is that there are huge differences in how the various states approach liability that is incurred from bodily injury and property damage that arises out of the consumption of alcohol. Even though the laws might read relatively the same, the application of the Dram Shop laws are vastly different state to state.

Some states have totally rejected the concept of dram shop liability in that they believe it is the “consumption” of alcohol, rather than the “serving” of alcohol that causes the damages. Those states include Delaware, Maryland, and Nevada.

The insurance industry rates states for the degree of difficulty in selling Liquor Liability Insurance with an expectation of making an underwriting profit. I live in a state that is rated a three (of four). It is not considered to be one of the worst states, but is above average when it comes to degree of difficulty.

In 2011 the State of Michigan issued a report titled, “The Availability and Pricing of Liquor Legal Liability Insurance in the State of Minnesota”. The Commissioner of Insurance Regulation issued this report.

It says, “Requiring liquor retailers to assume the liability for the illegal sale of liquor promotes responsibility in the sale of liquor and provides for the means of recovery for a person injured by the intoxicated person. To protect against these potential liabilities, liquor retailers typically purchase liquor liability insurance. Liquor Liability insurance covers the legal defense costs in a liquor retailer’s liquor legal liability lawsuits and pays the judgment of settlement or award, up to the policy limits.”

Many States Hold the Retailer Responsible for Liquor Legal Liability

The above fairly represent the intent of liquor legal liability laws and sounds quite logical. The joke starts, “A man walks into a bar. The retailer of liquor asks him what he wants and proceeds to let profit be his prime motivation as he sells the person much more liquor than he should, serving him when the patron is obviously intoxicated.”

I’m not about to state that owners of bars, restaurants, and taverns are all bad people. In fact, it has been my experience that many of them are very good people. In the early 90’s my insurance agency placed the liquor legal liability insurance for one out of every three liquor licensees in the State of Minnesota. At that time the insurance industry referred to the average liquor licensee as either a “schemer, a dreamer, or a drunk.”

That probably sounds caustic, but it still remains a reality.

Bars, restaurants, and taverns can only succeed if the managers have a great deal of creativity.

Businesses in the hospitality industry have a very hard time making a profit. About one in four of them will fail in the first year of business. Over three years that number rises to three in five. That is about on par with other small businesses. What is different is that most banks are not willing to consider loans to start bars and restaurants.

The hospitality industry is awash in cash. Liquor Liability Insurance premium is based on receipts. During my many years placing insurance for this industry getting the correct receipts from the licensees was a major pain. We finally demanded copies of their tax records and monthly sales tax documents. Even at that we knew that many establishments lacked the proper controls to correctly measure what amount of liquor was being sold. The cynic in me would suggest that tax avoidance may have been at the bottom of why the restaurants lacked proper accounting procedures.

In my early years in the insurance business I worked for a large insurance company that wrote surety bonds on building contractors. Bond companies look for the three Cs: character, capacity, and cash. Is the contractor honest? Has he created an organization that has exhibited the ability to finish a job of the size being considered? Most importantly, does he have the necessary cash to flow the job?

We were deep into the underwriting diligence on a large contractor when we visited his office and asked his bookkeeper for a look at their books. The bookkeeper said, “I suppose you want the bonding company books. I keep one set of books for the IRS, one for the bank, one for the bonding company, and one for the owners.”

I assume at least some bar and restaurant owners might have multiple books.

When you sell liquor, you drink liquor. There’s nothing wrong with drinking liquor until it is done in excess. Liquor lowers your inhibitions and reduces your ability to make concise decisions. You will be aware of your decisions, but you just won’t care.

People who own and manage bars, taverns, and restaurants are in the near proximity to alcohol and are susceptible to its effects.

Schemers, dreamers, and drunks.

These people provide great fodder for plaintiff attorneys when they get them on the witness stand. Couple that with the heavy turnover of waitresses and bartenders who could be witnesses in trials and it’s easy to see how bad law can result.

Liquor Legal Liability in Minnesota

Our statute (MN) states that liability will be incurred when liquor is served to persons who are obviously intoxicated and/or under 21. It is not necessary for a defendant to have a liquor license in order for dram shop liability to apply. Comparative fault applies: A person may recover so long as his/her fault is not greater than that of the defendant.1

One bad result occurred when a settlement was reached on a loss. A young man was killed in a single-car auto accident. The young man left behind two small children and a widow. He was scheduled to enter rehabilitation the next day (for the third time) and was out for one last fling. The bar where he was drinking cut him off and found him a ride home when he started acting intoxicated. They swear they didn’t sell him enough alcohol for him to have been as inebriated as he seemed to be.  Later investigation found out that he had been smoking marijuana in his car between drinks. He didn’t take the ride to his home that the bar had offered. He snuck out and drove to his brother’s house where he drank a large quantity of alcohol before having his fatal accident.

The bar’s Liquor Legal Liability Insurance company settled for a large six-figure amount.

Again, the Minnesota statute demands that comparative fault be applied. In this instance it would appear the person who killed himself was much more at fault than the bar. It also appears the bar acted in a prudent fashion. Yet, the outcome was based much more on the needs of the children than the other facts of the case.

We have seen this repeatedly in actual practice.

One of the largest losses we have been involved in was with a pizza shop that served 3.2 beer. In my opinion, it is practically impossible to reach a level of intoxication on this low alcohol content beer. Yet the Liquor Legal Liability carrier paid a very large sum of money on this loss. The reason again was the young survivors. Someone has to support them. Judges and juries think holding the bar responsible so their insurance company has to pay will somehow filter back to making things better for society.

Insurance Companies Create Larger Liquor Liability Losses

Another, and much bigger contributory factor is sometimes the insurance company’s need to protect its assets.

One of the larger companies we placed Liquor Liability Insurance with hired an “expert” to establish their underwriting criteria and rate structure. It was his philosophy that bars and restaurants who carried the minimum limits required by the state or local regulatory body were less desirable than those who bought higher limits. He based this on his opinion that the bars and restaurants carrying higher limits were protecting assets, while those that carried the minimum statutory limits were merely satisfying their legal requirement.

This philosophy does create positive underwriting results with personal auto, but it had unintended consequences in regards to the amount of money paid in Liquor Legal Liability Insurance settlements. Because of it and a pricing scheme that made it attractive to purchase higher limits, our book of business with that company was skewed to have a high percentage of policies with limits of $1,000,000 and up.

Most of the liquor liability losses we’ve seen have been vehicle-related. People do have auto accidents. People do drink alcohol. It follows that some people who have accidents have been drinking. The legal maximum blood alcohol content in every state of the union is .8 or lower. It is possible for a woman to be legally intoxicated after drinking only three drinks.

When a liquor legal liability loss comes into an insurance company’s claim department the adjuster will look at the culpability, and then at the policy limits. If the adjuster sees a proven line between an illegal blood alcohol content and the damages claimed under a policy that has $1,000,000 limits, things switch into high gear.   From that point forward the main concern of the adjuster is to settle the loss while “protecting” those limits.

The last thing an insurance company wants to do is allow a loss to go to trial when it’s possible they could have an award for the policy limits on a $1,000,000 policy. It is quite possible, and probable, that an adjuster will pay a very large sum to avoid a court trial.

Server Awareness

You might think waiters and bartenders should easily be able to tell who is intoxicated and who is not and avoid problems, but this isn’t the case.

First you have to consider that bartenders are paid to serve alcohol. They’re extremely busy remembering drink orders and dealing with the rapid pace of a hectic business. Waitresses and waiters earn 63% of their income from tips.

A good waitress welcomes a person who has had a few drinks because she knows they will probably feel good and leave a hefty tip. She isn’t going to jeopardize her tip unduly by cutting off a customer.

Perhaps MADD would be better served to drop their incessant harangue of zero tolerance and consider backing an increase in the minimum wage law for waiters and waitresses so that they could make the $11.20 they now make from wages and tips in just wages . . . and outlaw tips for anyone serving liquor.

Further, study after study has shown that chronic drunks are at the heart of the alcohol-related traffic fatalities. Identifying chronic drunks is becoming more and more possible, if proven techniques are applied by law-enforcement officers and social workers.

Liquor Liability laws seem to put the pressure on waitresses to solve this problem. A chronic drunk is the person who probably can sit in a bar for hours with an illegal blood alcohol content level, without showing physical symptoms.

Server awareness training is important, but obviously is not a panacea.

What to Do about Liquor Legal Liability If You’re the Host

If you’re a company that is hosting a hospitality suite at a convention, you might want to consider the following 7 Steps:

  1. Does the hotel have liquor liability insurance and what are their policy’s limits of liability. (Never buy and serve the alcohol yourself.)
  2. Make sure the people serving at your bar have had server awareness training
  3. Post a placard or two in your suite regarding safe alcohol consumption
  4. Have a policy in place on handling a guest who over-indulges
  5. Make sure your company’s insurance policy covers Host Liquor Legal
  6. Review your contract with the hotel to be sure it contains an indemnification clause holding you harmless
  7. Limit your reception to one hour and hold it earlier in the evening

Should Liquor Liability Insurance Premiums Be Based on Receipts?

As stated above, the premiums for Liquor Liability Insurance policies are based on receipts. This can create problems for the insurance companies in that normally a “white table cloth” restaurant has a minor risk when it comes to Liquor Liability exposure as compared to a tavern in a small town that caterers to blue-collar workers. Yet, a drink that sells for $15 in the restaurant might sell for $3 in the tavern.

Further, in 2011 there were nearly 18,000 fatalities from traffic deaths in rural areas versus about 14,500 in urban areas. The fatalities per mile traveled statistics showed that accidents were occurring about two and half times more frequently on rural roads than on urban. The more fatalities, the more that involve alcohol, and the more Liquor Legal Liability Insurance claims. Yet, with Liquor Legal Liability Insurance rated on a receipt basis, underwriters need to consider the cost for 12-ounce beer could be as low as $2 in a rural tavern compared to $6 or more in an urban bar.

It would seem more equitable for all to use a per drink basis and split that into beer, wine, and other drinks. Underwriters could look to normal ratios to determine accuracy by asking for financials and tax records.

Are Liquor Liability Laws Effective in Reducing Deaths?

Are Liquor Liability laws effective in reducing traffic fatalities? Certain studies suggest they are, but these studies are normally published by parties with an obvious bias. Consider this — as stated above, Delaware, Maryland, and Nevada have the lowest standards for Liquor Liability (basically do not hold the server responsible). The national average for traffic fatalities per million miles traveled is 1.1. In 2009 Delaware’s deaths per million miles traveled was 1.3, Maryland’s was 1.0 and Nevada was 1.2 . . . barely a perceptible difference.

Holding the server responsible has become, in my opinion, a social welfare program rather than a meaningful way to assign blame and create positive results.

Other Enhanced Insurance articles related to Restaurant Insurance:

What Kind of Insurance Does a Restaurant Need

Commercial Insurance for Restaurants: Fast Food to Fine Dining

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