November 2001

CGL Liquor Liability Exclusion Can Create Problems

Insureds whose businesses involve alcoholic beverages have serious insurance problems that need to be addressed due to the liquor liability exclusion contained in general liability policies. What this means to producers writing or quoting an account where the manufacture, distribution, sales, or service of alcoholic beverages plays a role is that the special exposures associated with alcoholic beverages and the liquor liability exclusion in the commercial general liability (CGL) coverage form will have to be carefully explained. Separate liquor liability coverage may have to be recommended to the insured.

This article highlights the important issues regarding liquor liability and the CGL's liquor liability exclusion. A more comprehensive and detailed discussion of this topic is contained in the Casualty volume, Public Liability M.13 pages; see Liquor Liability.

The current CGL forms (both the occurrence type and the claims-made type) contain a liquor liability exclusion that eliminates coverage for insureds if liability is imposed in any of three ways: due to any insured's causing or contributing to the intoxication of any person; because of the furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or due to the violation of any statute, ordinance, or regulation relating to the sale, gift, distribution, or use of alcoholic beverages. This exclusion applies only if the named insured is in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.

The liquor liability exclusion today has a somewhat different reading than its predecessor, the exclusion found in the 1973 comprehensive general liability policy. Under the 1973 liability policy—and in policies where the liquor liability exclusion is grounded in the language of that form—the exclusion eliminates coverage for insureds in the business of manufacturing, distributing, selling, or serving alcoholic beverages, or if not in the business, as an owner or lessor of premises used for such purposes if liability is imposed by violation of a statute or regulation.

The exclusion could be amended by the broad form comprehensive general liability endorsement, in which case the exclusion did not apply to liability arising out of the giving or serving of alcoholic beverages at functions incidental to the named insured's business, provided the named insured is not engaged in the alcoholic beverages industry. By this means, host liquor liability coverage is provided.

Despite the different language, the liquor liability exclusion in the current commercial general liability form is basically the same as that in the 1973 policy with the broad form endorsement. But there are two exceptions: 1) the current exclusion is specifically stated to apply only to the named insured in the business of manufacturing, distributing, selling, furnishing, or serving alcoholic beverages; it no longer applies to the statutory liability of a premises owner who is not engaged in the liquor business (thereby broadening coverage); and 2) by deleting the reference to the insured's indemnitee that is contained in the 1973 version of the exclusion, today's coverage is broadened to provide contractual liability coverage of the liquor liability exposure to any insured not in the liquor business.

Note that there are optional endorsements adopted by ISO for discretionary use by insurers to change the exclusion as it appears in the current CGL form.

A common problem of interpretation of the CGL liquor liability exclusion and an issue that has often found its way into court, is deciding what is, and what is not, being in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic businesses. In order to remove the uncertainty connected with this phrasing, the Insurance Services Office (ISO) developed two optional endorsements, CG 21 50 09 89 and CG 21 51 09 89.

Under CG 21 50, there is no change in the acts that trigger the exclusion: coverage is eliminated if the insured causes or contributes to the intoxication of any person; furnishes liquor to a minor or a person under the influence of alcohol; or if liability is assessed through statutory scheme. The major revision under the amendment relates to whom the exclusion applies. The often litigated phrase “in the business of” is eliminated. Instead, the exclusion applies only if the insured 1) manufactures, sells, or distributes alcoholic beverages, 2) serves liquor for a charge, regardless of whether or not the activity requires a license or is for the purpose of financial gain, or 3) serves liquor without charge, if a license is required for such an activity.

Endorsement CG 21 51 is identical to CG 21 50, with the exception that this version makes provision for excepting scheduled activities from the scope of the exclusion. To be covered, specific activities that would normally fall under the exclusion may be listed in the endorsement or the policy declarations as exempt from the liquor liability exclusion.

Regardless of the liability form used, the liquor liability exclusion means that persons or organizations in the alcoholic beverages industry insured under general liability forms are not sufficiently protected against several types of liquor-related exposures. For example, the general liability insurer would be relieved of liability imposed on a tavern keeper due to an automobile accident resulting from the serving of liquor to an already inebriated patron or to a minor. Therefore, these concerns have a need for liquor liability insurance.

Note that social hosts, including businesses that occasionally provide liquor in the course of business entertaining, are not usually deemed in the business of alcoholic beverages, and so should not be touched by the liquor exclusion. Organizations or institutions that occasionally provide liquor at fund-raisers and other noncommercial events may be treated differently and are discussed later.

Liability for alcoholic beverage-related incidents may be imposed in varying manners. The dram shop acts of several states impose strict statutory liability upon alcoholic beverages businesses. These acts create a specific right of action against entities in the alcoholic beverages industry for a person injured or whose property is damaged through the actions of an intoxicated person or of a minor who has been served alcoholic beverages. Jurisdictions vary in who is granted this right of action.

Other states have enacted alcoholic beverage control regulations that also impose liability in certain circumstances; however, these are somewhat more limited than dram shop acts. ABC regulations generally prohibit the sale or gift of liquor to a minor, a habitual drunkard, or an intoxicated person. Liability may also be imposed without specific statutory treatment under the principles of common law negligence. In cases where liability is imposed under dram shop or ABC provisions, it is apparent that the general liability insurer would be relieved of responsibility because of the violation of a statute, ordinance, or regulation. Where common law principles are involved, the insurer may be relieved of liability due to the “causing or contributing to the intoxication of any person” provision.

As can be seen, the liquor exclusion is broad enough to eliminate coverage entirely in some situations, and to at least raise questions about coverage for any business connected to the alcoholic beverages industry. Included in this category are taverns, convenience stores, drive-thrus, restaurants, private clubs, motels, hotels, package stores, breweries, distilleries, distributors, and (under the provisions of the 1973 CGL policy) owners, lessors, and trustees of premises used for liquor-related operations. All of these businesses have special liability problems where alcoholic beverages are concerned, and as a result, are prime prospects for liquor liability insurance coverage.

Charitable organizations, fraternal associations, and other concerns not in the alcoholic beverages industry, but who may on occasion sell alcoholic beverages at fairs or fund-raisers may or may not be considered in the business of alcoholic beverages for purposes of the liquor exclusion. This is an insurance gray area, and such groups should consider host liability insurance for maximum protection. One of the optional endorsements to the CGL form, CG 21 51, is specifically designed for this circumstance.

Any business that has a connection to the alcoholic beverages industry has a need for specialized coverage for liquor-related incidents. Prior to the 1986 simplified commercial forms program, liquor liability insurance was a specialty coverage protecting against liability eliminated by the liquor exclusion. With the advent of the 1986 simplified program, ISO introduced a separate liquor liability coverage part through the use of CG 00 33 10 01 (occurrence type liquor liability coverage form) and CG 00 34 10 01 (claims-made version). This coverage should be considered as a part of the insurance program of anyone engaged in the liquor business. The ISO liquor liability coverage forms provide coverage for liquor liability imposed on an insured for incidents arising out of the sale, furnishing, or serving of any alcoholic beverage. For a discussion of these two forms, see Liquor Liability Policy. The discussion is on the Public Liability A.9 pages.

The liquor liability coverage part has been formatted to follow the commercial general liability policy. The claims-made version contains the same retroactive date and extended reporting period provisions as the CGL. Additionally, the form may be amended in two ways: 1) an extended reporting period may be purchased for the claims-made version; and 2) an endorsement may be attached to restrict coverage only to specified locations. The basic liquor liability coverage part provides coverage for all locations of the insured.

In the specialty market, each liquor liability insurance contract must be checked carefully. Some policies refer specifically to the applicable dram shop law of a state, and cover nothing but liability arising out of the identified statute. Some of the following questions may arise: Does the insured have an exposure to the dram shop act of an adjoining state? Will the policy cover such an exposure? What protection is available if liability comes by way of common law interpretation rather than through statute?

And of course, liquor liability insurance is not a substitute for other liability insurance. An insured in the liquor business also needs all the other liability coverage necessary to businesses generally, such as, premises and operations liability coverage and products liability insurance.

The careful underwriting of liquor liability insurance takes in a number of considerations. With the exception of specialty companies, most insurers write liquor liability business on an accommodation basis—and the risk usually must be exceptional in all respects. Of primary concern is whether the state in which the risk is located actively imposes liability on vendors, and whether the route is by way of dram shop act, ABC regulation, or common law principles. If the former, the underwriter will want to determine whether the act imposes moderate or severe liability.

Liquor liability insurers will consider the moral caliber of the management and its financial condition. They will also require—if not already being practiced—liquor businesses to exercise basic precautions to avoid selling alcoholic beverages to minors or intoxicated persons.

Businesses that sell food and liquor, the latter on an incidental basis, in other words, food is the principal factor in drawing customers, are usually considered acceptable risks. First class hotels, package liquor stores, and drug stores that sell by the bottle are also acceptable risks. However, businesses that primarily sell liquor for consumption on the premises or cater to a more boisterous clientele may find insurance difficult to purchase—even though insurers may be willing to write all other insurance they need.