Learn about liquor liability insurance for bars, restaurants, nightclubs, caterers, weddings, special events and more - including how it works, coverage and costs. Liquor liability and host liquor insurance covers the liability and extra expenses tied to serving alcohol.
Liquor Liability Insurance
If you operate an establishment that serves alcohol, then you need liquor liability insurance. It's necessary if you want to safeguard your business against alcohol-related claims. If your establishment - whether it be a bar, winery, tavern, restaurant, or any other type of business - and you have a customer that gets drunk and injures himself or others, then you could be liable for the damages.
That patron or someone else could sue your establishment for damages. If you have liquor liability insurance coverage, then you'll have the cost of the damages covered.
What Is Liquor Liability Insurance?
Most businesses have some form of general liability insurance. This type of insurance protects your business against claims of bodily injury, personal injury, and property damage. If you own an establishment that serves alcohol, host liquor liability insurance is probably included in your general liability insurance policy. That covers you in your capacity as far as being a social host. It covers any claims against your establishment arise out of serving liquor incidentally, like alcohol served at a corporate event. However, host liquor liability coverage won't cover damages that result from claims if you are making, selling, or serving alcohol.
Businesses that should have liquor liability insurance often don't get it. Owners of businesses may not take into account the serious liability risks that come with serving alcohol. A drunken patron can become irate or disturb those around him. He could punch another customer. Or, he could cause a car accident because he didn't take an Uber home. Anyone who was injured, including the drunk person, could sue the establishment that served the alcohol.
A lot of businesses buy it from the insurance provider that they get general liability insurance from. If your general liability insurer doesn't offer this type of insurance, then a broker or agent can assist you with getting it from a company that specializes in it. It's really worth the effort to get it.
The insurance company agrees to pay amounts the insured is legally obligated to pay as damages because of liquor-related injury that this insurance covers. The liability must be imposed because of injury caused by a person to whom the insured sold, served, or furnished alcoholic beverages. The insurance company also defends against any suit that seeks damages but only if the coverage provided applies to the damages claimed.
Why Should You Invest In Liquor Liability Insurance?
Several states have passed "dram shop" statues. These laws put liability on liquor establishments for damages that their drunken patrons cause. The laws are different in terms of their severity. In some states, a liquor establishment can incur liability for an injury caused by a patron just because the establishment served it. The injured party doesn't even need to prove that they were negligent.
The cost of this type of coverage is different from state to state. That makes sense, because the laws are different in each state. Some states are more severe than others. The cost of the coverage is less in states with lax liquor laws and higher in states with tougher laws. ISO has set up a system that grades each state based on the chance of lawsuits to liquor establishments in operation there. Each state is graded numerically.
For example, a state with no law is rated a zero, and a state with a strict law is rated a ten. The chance of lawsuits goes up as the number goes up. The price of it rises as the number goes up. Some insurance companies have set up their own rating system for rating states.
Understanding The Liquor Liability ISO Coverage Form
The Commercial General Liability Coverage Form specifically excludes liquor related losses if your business sells, manufactures, distributes, serves, or furnishes liquor. In addition, many insurance companies exclude liquor coverage by endorsement for any operation that regularly serves liquor on or off premises, even though they are not considered "in the business." If your business has a liquor exposure and your Commercial General Liability Coverage Form excludes liquor liability (almost all do), Liquor Liability Coverage is a essential.
There is no requirement imposed or limitation on who can purchase liquor liability coverage. Businesses that manufacture, distribute, sell, serve, or furnish alcoholic beverages are the primary purchasers but any business is eligible. As a result, there are no functional eligibility requirements or guidelines.
The insurance company agrees to pay amounts you become legally obligated to pay as damages because of liquor-related injury that this insurance covers. The liability must be imposed because of injury caused by someone to whom you sold, served, or furnished alcoholic beverages. The insurance company also defends you against any suit that seeks damages but only if the coverage provided applies to the damages claimed.
What To Consider When Buying A Liquor Liability Policy
Here are a handful of things to look at when you're thinking of purchasing liquor liability insurance:
- Assault and battery protection - Lots of claims against liquor establishments come from fights. However, a lot of these claims may not qualify because of the intended or expected injury clause that you'll find in a lot of liquor liability policies. Luckily, you can purchase it back by buying insurance for that. A liquor liability package that doesn't include it has minimal value.
- Attorneys' fees - The cost of going to court for a claim can be very high. Ensure that your policy covers defense costs that are higher than the policy limit. Basically, the cost of going to court should be included, along with your liability limit. If it doesn't, your attorney costs could decrease or max out the limit of your policy, leaving you with very little to nothing to pay for the actual damages.
- Employee coverage - If you're serving alcohol, your employees might have a drink or two while they're working, even if you have mandated they can't do it. Search for a plan that treats your employees as customers. Don't get a policy that doesn't cover employees.
- Mental damages - Someone suing you can claim mental injury. They can seek monetary damages for mental anguish, psychological injury, and stress. Some policies don't cover those types of injuries. Ensure that your policy covers mental injuries.
- Rewards for safety and very few claims - Market leaders in the liquor insurance industry offer free training to establishment owners to improve their odds of reducing liquor liability lawsuits. Policyholders that do the training they provide can get a discount on their premiums. They can also get a good premium reduction exchange for a clean history with very few losses.
These are only a few of the factors that underwriters consider in their coverage decisions to write liquor liability policies. Other important considerations are:
One of the first underwriting considerations is the type of liquor license the business holds. Neither of the liquor liability coverage forms provides coverage if the establishment does not have the appropriate liquor license. Every state has different rules and requirements concerning issuance of liquor licenses but the following are the most common licenses:
- Distributing and wholesaling
- Off premises consumption only-beer and wine
- Off premises consumption only-beer, wine, and spirits
- On premises consumption-beer and wine
- On premises consumption-beer, wine, and spirits
- Special events licenses
Liquor and alcoholic beverage manufacturers are the farthest removed from consumers of all businesses in the liquor and alcoholic beverage business. As a result, their exposure to liquor liability is lower than other liquor-related businesses. Their primary exposure may be products liability that the Insurance Services Office (ISO) CG 00 01-Commercial General Liability Coverage Form covers, not liquor liability. However, manufacturers may still be involved in situations that require separate liquor liability coverage, such as the following:
- Tasting rooms or tours that include samples
- Direct mail order or Internet sales
Manufacturers engaged in direct sales should be underwritten like risks with off-premises consumption. The key element to consider is whether or not their procedures prevent or eliminate cyber sales to underage customers. Simple statements to the effect that underage drinkers are not permitted to purchase alcohol are insufficient. Will they stand up in court? Will they prevent lawsuits and other legal actions? The manufacturer must do everything it can to ensure that it makes Internet or mail order sales limited to only adult customers.
Distributing & Wholesaling
Liquor and alcoholic beverage distributors and wholesalers have liquor liability exposures that fall somewhere between those of manufacturers and package stores. However, their liquor liability exposure is usually comparatively low unless, like manufacturing, they are involved in direct sales to customers by the following:
- Customer pickup at the warehouse
- Mail order
- The Internet
Direct sales to customers or pickup at the warehouse are important, especially if they involve large volumes of liquor or alcoholic beverages. This is because these customers may be purchasing liquor or alcoholic beverages for underage drinkers and the distributor may be the only link in the chain of events with available assets to pay for a serious loss.
Off Premises Consumption Only
Businesses that sell liquor and alcoholic beverages for consumption off premises frequently have extremely lax and inadequate procedures to screen customers. It is best to have strict and foolproof procedures in place that require customer identification every time they purchase alcoholic beverages. Underage employees should never be allowed to ring up alcoholic beverage sales because:
- It may not be legal in the particular state
- They may not follow identification procedures for their peers
- They may purchase liquor or alcoholic beverages for themselves or friends
The ratio of alcoholic beverage sales to sales of all other products is important. Establishments that have high alcoholic beverage sales ratios usually have greater exposure to loss.
On Premises Consumption
Businesses that sell liquor and alcoholic beverages for consumption on premises present the greatest exposure to loss. They are more accountable and are held to a higher standard than any other business because they observe their customers in addition to serving them. These businesses must deal with two important conflicts of interest. Their profits depend on sales to a steady stream of regular customers.
However, the same elements increase the likelihood that an alcohol or liquor-related loss or incident will take place. As a result, it is both difficult and essential that these businesses balance the risk of customer alienation by refusing to serve customers who are already intoxicated or about to be against the need to increase profits in order to remain in business.
Underwriting businesses like these begins with analyzing the ratio of alcoholic beverage sales to food and non-alcoholic beverage sales. Higher alcoholic beverage sales mean a higher exposure to a liquor liability loss. The underwriting analysis must also evaluate other activities that may occur on the premises to encourage and increase the amount of alcohol consumed. Examples are:
- Happy hour
- Free drinks for women/ladies nights
- Two for one drink specials
- Featured drink specials at reduced prices
- Drinking contests promoted by bands and other live entertainment
- Similar and related activities
- Each of these activities increases the possibility of a loss because customers are encouraged to drink more.
On the other hand, activities that encourage consuming food have the opposite effect. Food actually reduces the amount of alcoholic beverages consumed and the possibility of loss because it absorbs some of the alcohol consumed and reduces the level of inebriation and impairment.
Proper training is the key to controlling exposures. Bartenders should keep track of the number of drinks they send to each table to try to prevent excess consumption. Servers must be trained to always request proper identification for everyone they serve.
Training by TIPS* or similar groups is the proper way to handle customers and should be required along with establishing a specific set of procedures and adhering to them. Designated driver incentives and arrangements with local taxi companies should also be developed and be available if and when the need arises.
Special Events Licenses
Special events licenses are issued for specific activities or events where alcohol is served. These events are usually for only a few days or even just a few hours but the exposure may be greater than the exposure for a regular business operation. Special events are usually characterized by inadequate or complete lack of controls and the event sponsor's inexperience in handling alcohol-related situations. The key element is control. Loss exposures are minimized when the sponsor arranges for and has enough people to do the following:
- Check every attendee's identification
- Monitor the activity of attendees
- Observe drinking behavior and count drinks
- Observe the serving and wait staff and support their activities
- Open or self-serve bars should be prohibited. Serving and wait staff should be trained and experienced in dealing with persons that consume alcoholic beverages.
Bring Your Own Bottle Establishments (BYOB)
Restaurants and other establishments may not actually provide alcohol. However, they can provide an environment where alcohol consumption is not only permitted but is encouraged (BYOB). They may provide the non-alcoholic set-ups, entertainment, and other furnishings and arrangements for drinking. Underwriting this exposure is difficult because the liability laws are not as explicit as to when licenses are required.
It is very important to carefully examine the activities that take place at the establishment, the age of patrons, and hours of operations. It is also very important to determine if the named insured chooses to not serve alcohol or is forced into this activity because its liquor license was revoked.
Liquor Liability Insurance - The Bottom Line
We hope this article on liquor liability insurance was informative. Lastly, liquor liability insurance doesn't cover specific claims arising out of any illegal sales. For example, there isn't any type of coverage you can get that will apply if a lawsuit alleges you sold alcohol without a license.