Liquor Liability Insurance: More Than Half Still Do Without

By | July 23, 2001

Court decisions coupled with new state statutes are holding sellers of alcoholic beverages increasingly responsible for damages under liquor liability laws. Nevertheless, liquor liability insurance continues to be a quiet, if not dwindling, market in Texas and elsewhere. In fact, more than half the risks choose to operate without liquor liability insurance.

Licensed beverage, intoxicating drink, liquor…despite the names, alcohol, since the dawn of history, has been an important source of income, both private and public, as well as a never-ending source of social problems.

Alcohol exists in nature as part of the living process for plants and animals, although since before the first stirrings of history, man had learned to enhance the natural processes. The earliest record of alcohol production is found on Mesopotamian pottery dating from 4,200 BC. The art depicts the process of fermentation. In 2,300 BC the Code of Hammurabi referred to a number of price-fixing and dispensing controls for alcoholic beverages. And so the die was cast.

By the mid-1700s England had gone to great lengths to encourage the production of gin after the more expensive and less potent ale and port fell out of favor. Not long afterward, England regretted its gin policy and began imposing taxes and ever stiffer regulations governing the production and sale of “hard liquor.”

Meanwhile in the fledgling United States, alcohol was fast-becoming a serious problem as well. Connecticut was typical. By 1779 the state had passed 80 major laws concerning alcoholic beverages based mostly on the teachings of the church. Despite the teachings and the laws, drinking excesses mounted throughout the colonies as communities distilled their own spirits. Attempts to impose taxes and controls on the financially lucrative enterprise gave rise in 1794 to the Whiskey Rebellion in western Pennsylvania. The uprising was brought under control only when then President Washington amassed 13,000 troops to restore law and order.

Temperance movements have since come and gone with the likes of hatchet-swinging Carry Nation in Kansas to the creation of the Prohibition Party to the Prohibition Era in the early 20th century under the 18th Amendment.

Just before Christmas in 1933, Congress adopted the 21st Amendment which repealed the 18th, thereby bringing an end to Prohibition and federal control of alcohol. Since then, states have been largely responsible for control of alcoholic beverages through enactment of dram shop liability laws. “Dram shops” refers to establishments that served alcohol by the dram, a unit of liquid measure used in the United States during the colonial period.

These laws stipulate that people who serve alcoholic beverages may be liable under state laws for damages resulting from the consumption of those beverages. Liability may be imposed either under specific state laws (“dram shop acts”) or under the general law of negligence.

Texas Dram Shop Law
The Texas Dram Shop Law was passed in 1987. This law allows individuals to bring civil action against a person who serves, sells, or provides alcohol to someone who is visibly intoxicated to the extent that he presents a clear and obvious danger to himself or others. All the injured party has to do is prove that the intoxicated person was served after they were obviously intoxicated, and the intoxication was the proximate cause of the damage incurred.

In April 1993, dram shop law liability was extended. It now allows the intoxicated person to sue for damages. Because the dram shop law included references to “himself,” case law finds that the law gives an individual the right to sue for his own damages. The court has also found that the Comparative Responsibility Act applies to the dram shop laws. That act holds that the intoxicated person can recover damages only if the establishment is more responsible for the individual’s intoxication than himself.

Despite the laws defining responsibility and the number of drunk drivers involved in or killed in motor vehicle crashes, few alcoholic beverage sellers purchase liquor liability insurance. (One-third of the people killed in motor vehicle crashes in 2000 – 16,068 – had some measure of alcohol in their blood, according to preliminary estimates from the U.S. Department of Transportation.)

Most agents and brokers in Texas agree that they quote far more liquor liability coverage than they place. Jack Huff, president of Hull & Co. General Agency in Dallas, maintains that his hit rate on stand-alone policy quotes is about 20 percent. “I would say the premium cost and requirement for coverage drives the decision,” said Huff. “If a landlord requires the cover, then the liquor establishment will purchase it. If not, then we probably won’t place it.”

Rosemarie Marshall, an underwriter with Heath Insurance Brokers in Dallas, agrees that only a small portion of the requests for quotations received at her brokerage ever result in coverage getting placed. “Most think the premium is too expensive,” she said. She speculated, Maybe the retail agents don’t understand how to market the line.”

An underwriter for The Insurance Marketplace in Austin said she is always surprised at the number of requests for restaurant quotes that do not include liquor liability. She said the litigious climate and the movement toward laws and court decisions that hold sellers liable for damages should motivate liquor sellers to purchase the coverage, but in fact, it does not.

Traditional Trends Continue
Despite these changes, the continuing availability of the coverage and firming of premium by 20 to 30 percent, Industry spokespersons agreed that traditional trends for the line continue. Larger, more expensive restaurants are inclined to carry liquor liability cover, while smaller or newer establishments may go without. In fact if the numbers are any indication, there may be less liquor liability insurance in place now than in the previous year.

In Texas for calendar year 1999, earned premium was $2.9 million for the line, while the figure for the previous year was $4.6 million, according to Texas Department of Insurance figures. Written premium for the line in 1999 was $3.16 million. The greatest portion comes from restaurants, taverns and bars, reports TDI. With some 96,000 liquor licenses issued in 2000, according to the Texas Alcoholic Beverage Commission, those figures work out to about $32 per establishment.

The Texas Restaurant Association reports that a 1999 survey found that of 300 restaurants reviewed, only 45 percent carried liquor liability insurance.

Clearly the line is not especially robust, although the loss experience is actually quite good.

TDI reports that for 1999, the most recent year for which it has figures, paid loss experience was $54,674. Of the total, clubs accounted for $10,717; stores selling alcohol for off-premises consumption, $20,108 and restaurants, taverns and bars, $23,849.

Industry observers report the number of wrongful death cases decided against alcohol providers surged in the early 1990s. In fact, the Insurance Information Institute reports the average judgment against alcohol providers measured nationally had risen by 1990 to $500,000.

Marshall and Huff agree that from their vantage points, claims experience is very good. “I can’t recall ever having had a claim, in fact,” Marshall said. Huff echoed the comment. “There are some claims, but we see very little.”

The majority of liquor liability insurance continues to be written as an endorsement under the insured’s general liability policy. Jim Sammons, Guaranty Insurance Services commercial retail manager in Austin, said most of the policies his firm handles are through standard markets due largely to the nature of the risks. “We deal mostly with restaurants and beer distributors and the standard market is most common for this,” he said. He explained that the liquor liability portion is usually part of a GL package.

Sammons said he does go through wholesale channels when he has an exposure not suited for the standard markets such as a new or sometimes smaller risk.

“Most of the requests we get for quotes come to us as part of a package,” said Marshall. “These are either as restaurants, nightclubs, country clubs and some convenience stores,” she added.

Huff agreed that endorsements are most common. “Coverage for most package stores is found in the standard markets,” he said. “But we have in-house authority with Scottsdale for liquor liability exposures. Otherwise we can go outside to place the coverage,” Huff explained .

Premiums for the line begin at $500-$600 and may run to as much as $10,000, depending on receipts, nature of the risk, loss experience and limits. Limits are typically $1 million or run equal to the limits of the GL.

Sammons said a requirement for placing the coverage is that all sellers/ servers must be certified through one of the more than 100 seller training programs available in Texas and used to familiarize employees with laws concerning intoxicated persons and sales to minors. Such programs are sponsored by colleges or private companies, and have been approved by and are monitored by the Texas Alcoholic Beverage Commission.

The classes are required to cover the laws concerning the sale or service of alcoholic beverages to minors and intoxicated customers, as well as techniques to prevent such sales.

Dram Shop Does Not Require Observation of Intoxicated Behavior

Perseus, Inc. v. Canody, 04-97-00760-CV (Tex.Ct.App.—San Antonio, March 31, 1999)

A couple was killed by a drunk driver as they walked along the shoulder of a road. The couple’s parents sued the driver and Perseus, the owner and operator of the night club where the driver had been drinking prior to the accident. The jury found Perseus 35 percent responsible for the couple’s deaths. Because the evidence was legally and factually sufficient to support the liability finding, and because Perseus failed to establish its entitlement to the protection of the “safe harbor” defense under the Texas Alcohol and Beverage Code, the Appeals Court affirmed the trial court’s judgment.

Under Texas law, a provider of alcoholic beverages can be held liable for damages sustained by an innocent third party resulting from a patron’s intoxication. The Dram Shop Act creates such liability upon proof that (1) when the provision occurred, it was apparent to the provider that the individual was obviously intoxicated to the extent that he presented a clear danger to himself and others; and (2) the recipient’s intoxication was a proximate cause of the damages suffered.

Perseus first claimed that the evidence did not establish that it was apparent to Perseus’s employees, when they provided alcoholic beverages to the driver, that the driver was obviously intoxicated or that he presented a clear danger to himself and others. Perseus argued that there was no direct testimony that a Perseus employee actually observed signs that the driver was intoxicated. However, the Court rejected Perseus’s argument. First, the statute does not require evidence that the provider actually witness the intoxicated behavior. Second, the “apparent to the provider” statutory standard does not require a subjective intent on the part of the provider to continue serving an intoxicated patron. The record contains evidence from which the jury could have inferred that the driver’s intoxication was “apparent to the provider.”

Under the Texas Alcohol and Beverage Code, the “safe harbor” defense provides that the actions of an employee shall not be attributable to an employer if (1) the employer requires its employees to attend a commission-approved seller training program; (2) the employee actually has attended such a training program; and (3) the employer has not directly or indirectly encouraged the employee to violate such law. This defensive issue was submitted to the jury, which found that Perseus failed to comply with the statute. Based upon the evidence presented, the jury reasonably could have inferred that not all of Perseus’s employees were certified and therefore could have rejected the safe harbor defense on that basis. Perseus failed to establish its entitlement to the safe harbor defense as a matter of law, and the jury’s failure to find in favor of Perseus on this defense is not against the great weight and preponderance of the evidence. Therefore, the Court affirmed the judgment of the trial court.

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