Raising the Bar—The Liquor Liability Exclusion in the CGL
January 2008
Considering our collective fascination with
saloons, taverns, and pubs, it is little wonder that those organizations regularly
selling or serving liquor need special liability insurance.
by Craig
F. Stanovich
Austin &
Stanovich Risk Managers, LLC
How ingrained in our culture is the idyllic bar? Top billing in the first
World Series scorecard in 1903 (then known as the World's Championship Games)
was secured by Michael 'Nuf 'Ced McGreevey, to promote his famous "Third Base"
saloon, so named because "it was the last stop on the way home."1 First broadcast by NBC in 1982, the highly popular television situation comedy,
"Cheers," featured a local bar "where everyone knows your name." And more recently,
the compelling characters so vividly depicted in J.R Moehringer's best selling
memoir The Tender Bar: A Memoir were revealed
largely as patrons of Publicans restaurant and bar of Manhasset, Long Island.2
Those organizations that are not engaged in selling or serving of alcohol
often think of risk in terms of its employees consuming alcohol (or using other
substances) before or during working hours. While this risk should not be minimized,
all organizations must also have an appreciation for other risks that involve
alcohol—such as the occasional serving or furnishing of alcohol to others or
renting to tenants who sell or serve alcohol. All of this should lead to several
questions, including what is the extent of coverage provided in the commercial
general liability (CGL) policy for claims related to selling, serving, or furnishing
of alcoholic beverages?
The Liquor Liability Exclusion
The third exclusion of the standard Insurance Services Office, Inc. (ISO)
CGL policy applies to "liquor liability." Unchanged since the mid-1980s, the
liquor liability exclusion wording contains three main parts, none of which
apply at all unless you [a named insured
on the policy] are in the business of manufacturing,
distributing, selling, serving, or furnishing alcoholic beverages. What does
"in the business" mean? More on that later.
Host Liquor
It is plain by the "in the business" exception that the liquor exclusion
is not meant to apply to all persons or organizations. The result is the so-called
host liquor liability coverage found in the CGL. Host liquor liability coverage,
which used to be a separate express coverage grant provided as part of the Broad
Form CGL Endorsement added to the 1973 ISO comprehensive general liability policy,
is intended to provide coverage for a person or organization for certain functions
or events that are incidental to the named insured's business.
A company picnic or an open house for customer appreciation at which beer,
wine, or other alcohol is served or furnished are examples of the types of events
for which host liquor protection is provided. Should an employee at the picnic
or a customer at the open house overindulge and consequentially injure others
(non-employees) due to their intoxication, the unendorsed CGL will protect the insured from claims made by persons injured
by the overserved employee or customer.
Distilling the Liquor Exclusion
For those who treasure a grasp of the obvious, the liquor exclusion applies
only to bodily injury (including medical payments) or property damage. Of course,
this fact is only meaningful if a claim is made against an insured for a personal
or advertising injury offense.
For example, if the local restaurant contributes to the intoxication of a
person who later attends a meeting in which the intoxicated person slanders
everyone in the room, the restaurant's CGL would not exclude coverage against
allegations that the restaurant was, at least in part, responsible for the slanderous
remarks.
Causing or Contributing. The first clause
of the liquor liability exclusion is expansive—causing or contributing to the intoxication of any
person is excluded. Said differently, this exclusion applies even if it is alleged
that Tommy's Tavern (the named insured) served only the first drink to an absolutely
sober patron—who then leaves Tommy's and visits numerous other establishments,
becomes intoxicated, and injures a pedestrian with his automobile. While Tommy's
Tavern may not ultimately be liable for the pedestrian's injuries, its CGL insurer
will not provide a defense for the claim.
Underage or Under the Influence. No coverage
applies to liability that results from serving an underage person or serving
a person who is already under the influence.
There is no requirement in the above two clauses, as is sometimes mistakenly
believed, that that liquor exclusion applies only to statutorily imposed liability—a dram shop
or alcohol control statute. While dram shop or alcohol control statutes may
ultimately determine liability, the first two clauses of the exclusion apply
whether liability is imposed by common law or statute.
The notion of excluding coverage regardless of the source of liability is
illustrated by the second clause of the exclusion. Furnishing alcohol to a minor
or to someone who is obviously under the influence would likely be considered
failure to exercise reasonable care and thus constitute negligence and result
in the liability of the server even in the absence of any statutorily imposed
liability. In other words, the liquor exclusion is intended to apply even if
dram shop or alcohol control statutes do not.
Statute or Ordinance. The last of the three
exclusionary clauses specifically addresses liability that results from violation
of statutes, ordinances, or regulations that relate to selling, (including gifts),
distributing, or use of alcoholic beverages.
If an insured is liable for bodily injury or property damage because of alcoholic
beverage statutes, ordinances, or regulations, no coverage applies in the ISO
CGL. Here is where the CGL liquor exclusion follows the dram shop or alcohol
control statutes. If liability is imposed by such statutes, even if the insured
is not liable under the common law principles of negligence or other tort liability,
no coverage is provided.
Held Liable by Reason of. Generally, courts
have found the liquor liability exclusion to be unambiguous when applied to
a for-profit organization that sells alcohol.
Generally, attempts to craft allegations to avoid the liquor exclusion, such
as characterizing the claim as a negligent failure to train and supervise staff,
have been rejected by the courts. The reach of the exclusion may be limited,
however, even for organizations that do not dispute being "in the business."
For example, in Interstate Fire & Casualty v. 1218
Wisconsin, Inc., 136 F.3d 830 (D.C. Cir. 1998), the federal circuit court
of appeals found the liquor exclusion did not apply to one of four allegations
made against a D.C. bar, the Third Edition, by a patron who was attacked at
the bar by another intoxicated patron. Although the bar was found to have negligently
contributed to the intoxication of the attacker, the court found the liquor
exclusion did not apply to the allegation that the bar failed to protect the
injured person from the attack. The court reasoned that the duty to protect
patrons was not contingent on the bar's "causing or contributing" to the intoxication
of the attacker. The insurer was required to defend the bar against the "failure
to protect a patron" allegation despite the liquor exclusion in the CGL.
Landlords and Tenants
In some limited circumstances, dram shop statutes may impose liability for
the serving or furnishing of liquor on the landlord for the acts of their tenants. If a landlord
has purchased an ISO CGL policy (1986 edition or later), the landlord will be
covered on its policy (the liquor exclusion does not apply to the landlord),
provided the landlord was not also engaged in the business of selling, serving,
furnishing, or distributing alcoholic beverages.
Caveat. Commercial real estate leases often
require the tenant to add the landlord to the CGL policy of the tenant as an additional insured as well
as hold harmless and indemnify the landlord for liability arising out of the
tenant's acts or omissions in connection with the leased premises.
While this approach to risk shifting clearly has benefits, insurance protection
from liquor related claims is not among them. If a tenant is a tavern, the tenant's CGL policy will not protect the
landlord as an additional insured for liquor related claims. The liquor exclusion
in the tenant's CGL policy applies to any insured, including those added to the policy as additional insureds.
It is irrelevant that the landlord is not in the liquor business. The tenant's
CGL excludes claims against any insured if the tenant [the named insured] is in
the liquor business. Similarly, while the tenant is still obligated by the indemnity
agreement to the landlord, the contractual liability coverage included in the
tenant's CGL policy will not respond to the tenant's obligation to indemnify
the landlord due to the liquor liability exclusion.
In the Business
The unendorsed ISO CGL policy does not, within the liquor exclusion, attempt
to define what constitutes being "in the business" of manufacturing, distributing,
selling, serving, or furnishing alcoholic beverages. For certain organizations,
such as not-for-profit entities (whose activities may range from one-day fundraisers
at which liquor is sold to organizations that have fully stocked cash bars open
to the public several days per week), the exact meaning of "in the business"
has proved elusive at best.
Court Interpretations. In the above circumstances,
several courts have interpreted "in the business" to mean a commercial enterprise
with a profit motive, resulting in the inapplicability of the liquor exclusion.
For example, in American Legion Post No. 49 v. Jefferson
Ins. Co., 485 A.2d 293, 294 (N.H. 1984), the court found the phrase "in
the business of" to be ambiguous because "it may be defined as any regular activity
that occupies one's time or activity with direct
profit objective." [Emphasis added]
A similar result came out of Newell-Blais Post No.
443, Veterans of Foreign Wars of the United States, Inc. v. Shelby Mut. Ins.
Co., 487 N.E.2d 1371, 1373 (Mass. 1986), in "deciding an organization's
nonprofit character prevented application of the exclusion."
A more recent case, Mutual Serv. Cas. Ins. Co. v.
Wilson Twp., 603 N.W.2d 151 (Minn. App. 1999), involved a Minnesota township's
beer sales at a 1-day fundraising event. Specifically, on July 23, 1996, the
Wilson Township Volunteer Fire Department sponsored a 1-day festival called
Wilson Daze, with activities such as tractor pulls, children's games, silent
auctions, raffles, soft drinks, beer (Wilson had a temporary license to sell
the beer), and food sales. While at the town festival, an attendee was served
alcohol while obviously intoxicated and caused an auto accident, injuring another
motorist and the motorist's passenger, both of whom sued Wilson Township.
The CGL insurer for Wilson Township denied coverage, contending Wilson Township
was engaged in the business of selling alcoholic beverages because they had
a license to sell. Following a review of several other cases (including the
two cited above), the Minnesota appeals court concluded that meaning of "in
the business" was not ambiguous, and meant engaging in a commercial enterprise.
After examining "the insured's activities and the character of organization,"
the court ruled:
Wilson Township is a nonprofit governmental organization selling beer at Wilson
Daze for fundraising purposes. The township's sale of beer was a temporary,
one-day-per-year occurrence rather than a permanent, ongoing operation.
Moreover, the township did not generate substantial profits from the beer
sales. Given these facts, we conclude the insured was not in the business
of selling, serving, or furnishing alcoholic beverages for the purposes
of the liquor liability exclusion.
Some Dissent. Not all courts adopted the
"not in the business" definition for the purpose of applying the liquor exclusion.
For example, in Spangers v. Greatway Ins. Co.,
498 N.W.2d 858 (Wis. App. 1993), the court ruled the liquor exclusion did apply to a "VFW operated bar open to
the public 3 nights a week, employed 8 people, including 6 bartenders, and occasionally
realized profits." Similarly, in McGriff v. U.S. Fire
Ins. Co., 436 N.W.2d 862-63 (S.D. 1989), the court decided that a "nonprofit
fraternal order that operated a bar at significant profit, allowed nonmembers,
paid sales tax, and held a liquor license was in the business of selling alcohol."
ISO Responds: Amendment of Liquor Liability Exclusion
To avoid providing coverage for organizations, whether nonprofit or otherwise,
which many believed were justly considered to be in the business of selling
or serving liquor, ISO introduced two optional endorsements to further sharpen
the liquor liability exclusion.
Two Versions
The Amendment of Liquor Liability Exclusion (CG 21 50 09 89) and its companion
Amendment of Liquor Liability Exclusion—Exception for Scheduled Activities (CG
21 51 08 89) both completely replace exclusion c. of Coverage A of the CGL policy.
The only difference between the two endorsements is that CG 21 51 allows the
option of not applying the exclusion to the specific activities that the policyholder
and insurer agree to schedule on the endorsement.
Effect of Amended Exclusion
Removed entirely by the amended liquor liability exclusion is the phrase
"in the business." Instead, the amended liquor exclusion applies if the named
insured [You]:
- Manufacture, sell, or distribute alcoholic beverages; or
- Serve or furnish alcoholic beverages for a charge, whether or not the
activity requires a license or is for the purpose of financial gain or livelihood;
or
- Serve or furnish alcoholic beverages without a charge, if a license
is required.
The last two clauses broaden the exclusion significantly—with the Amendment
of Liquor Liability Exclusion attached, no coverage is afforded for serving
or furnishing alcoholic beverages if a charge is made or if a license is required.
While the amended exclusion clearly eliminates coverage for American Legion
Halls or VFW Posts that have fully stocked bars, the exclusion also removes
coverage for what may reasonably be expected to be a "host liquor" risk.
An illustration of what might be considered an incidental "host" exposure
for which the CGL likely does not provide coverage due to the amended liquor
exclusion may help make the matter a bit more clear. The local Chamber of Commerce
sponsors a "Taste of the Town" event at a local restaurant. Other area restaurants
are invited to set up a table and display their creations, providing samples
to those who attend, including one table at which a wine tasting is offered.
The admission fee to the event is $20 and is payable to the Chamber of Commerce,
a nonprofit organization.
While the event is almost exclusively food, and the wine tasting does not
require a liquor license, the admission fee may be construed as a charge for
the furnishing of liquor: the wine tasting. Thus, the Chamber would not be covered
by their CGL for any claims that arise out of the wine tasting due to the amended
liquor exclusion.
Similar events sponsored or arranged by a wide variety of organizations,
from for-profit businesses to youth sports organizations, which may include
in the cost of a fundraiser dinner a ticket(s) for an alcoholic beverage, i.e.,
serving alcohol for a charge. All these events would not be covered under that
organization's CGL policy due to the breadth of the amended liquor exclusion.
Another example may be fundraiser golf tournaments in which the sponsor sells
to persons or groups a single price admission to the golf tournament, which
includes not only the greens fee but a golf cart and some cold beer for the
foursome.
Of course, had the CGL for the Wilson Township been endorsed with the amended
liquor exclusion, no coverage would have been provided for their Wilson Daze
fundraiser for two reasons—they charged for beer and the event required a license.
Use of Amendment of Liquor Liability Exclusion
While it was originally intended that the amendment to the liquor exclusion
was to be used mostly with nonprofit organizations, today insurers routinely
use the amendment on virtually every CGL policy
issued (a few states approved for use only the second version of the
amendment CG 21 51 08 89). Agents and brokers and others advising policyholders
need to be aware of implications of the amended liquor exclusion and the likelihood
that their CGL policy has attached to it the amendment.
Conclusion
As serving alcohol is so much a part of our culture, it is of great importance
for organizations of all types to carefully consider the liability to which
they are exposed in serving or furnishing alcohol and whether their CGL insurance
provides them coverage for their activities or events. Put another way, simply
assuming their liability insurance will respond to claims because of the serving
or furnishing of alcohol may result in a very unwelcome surprise. Once aware,
advisers can now work with insurers, who may be willing to use the Amendment
of Liquor Liability Exclusion—Exception for Scheduled Activities (CG 21 51 08
89) endorsement and negotiate as an exception to the exclusion scheduled activities
for which the insurer is willing to provide coverage.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.