INTRODUCTION

Underwriting liquor liability coverage involves evaluating risks from a distance. The actions, or inaction, of an insured party can trigger an accident. Like all risk exposures, accidents may or may not happen. Since underwriters do not have a direct relationship with the individuals who cause these incidents, they cannot influence the outcome once an accident occurs. Their primary objective is to minimize the likelihood that the insured will engage in actions that could lead to such events.

Example: Jon was a surgeon with a young family. One day, while he was driving to work, Shirley struck him with her vehicle. She was 18, driving a stolen car, and intoxicated. Red's Bar and Grill served her drinks an hour before the accident. Red's was held legally liable for Jon’s injuries because it served a person underage.

The only action an underwriter could have influenced was whether Shirley was able to get a drink at Red’s. Once that first drink was served, Red’s became a party to the accident according to the law and the insurance company that issued the coverage became responsible for defending the legal action and paying damages.

LIQUOR LICENSES

One of the initial underwriting considerations is the type of liquor license the business holds. Neither of the liquor liability coverage forms provides coverage if the establishment lacks the appropriate liquor license. Each state has different rules and requirements for issuing liquor licenses, but the most common types include:

Manufacturing
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

MANUFACTURING

Liquor and alcoholic beverage manufacturers are the most removed from consumers among all businesses in the liquor industry. As a result, their exposure to liquor liability is lower than that of other liquor-related businesses.

A manufacturer's primary exposure is likely to be product liability, which is covered by the Insurance Services Office (ISO) CG 00 01 – Commercial General Liability Coverage Form. However, it still does not include liquor liability. Manufacturers may still face situations requiring separate liquor liability coverage, such as the following:

Tasting rooms or tours that include samples
Direct mail order or Internet sales

Manufacturers involved in direct sales should be classified as applicants with off-premises consumption. The primary consideration is whether their procedures prevent or eliminate sales to underage customers online or by mail. Simple statements like 'underage drinkers are not permitted to purchase alcohol' are not sufficient. Will these statements withstand court challenges? Can they prevent lawsuits and other legal actions? Manufacturers must implement responsible and credible measures to ensure that Internet and mail order sales are restricted to adults 21 and over.

DISTRIBUTING AND WHOLESALING

Liquor and alcoholic beverage distributors and wholesalers have liquor liability exposures that are generally between those of manufacturers and package stores. However, their liquor liability exposure is usually relatively low unless, similar to manufacturers, they engage in direct sales to customers through the following:

Online
Mail order
Customer pickup at the warehouse

Direct sales to customers or warehouse pickups are crucial to underwriting, especially when they involve large quantities of liquor or alcoholic beverages. These customers might be buying liquor for underage drinkers, and the distributor could be the only source with assets to cover a significant loss.

OFF PREMISES CONSUMPTION ONLY

Businesses that sell liquor and alcoholic beverages for off-premises consumption face losses mainly because of lax or inadequate procedures for screening customers. It is best to implement strict procedures, such as requiring customer identification for every alcoholic beverage purchase. Underage employees should never be allowed to ring up alcoholic beverage sales because:

It might not be legal in that specific state.
They might 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 significant. Establishments with high alcoholic beverage sales ratios typically face higher risk of loss.

ON PREMISES CONSUMPTION

Businesses selling liquor and alcoholic beverages for on-premises consumption face the most significant risk of loss. They are more accountable and held to higher standards than other businesses because they not only monitor but also serve their customers. These businesses must manage two key conflicts of interest.

Their profits rely on steady sales to regular customers, but the same factors that drive sales also increase the risk of alcohol-related incidents or losses. Therefore, it is both challenging and crucial for these businesses to balance the risk of losing customers by refusing service to those who are already intoxicated or about to be, against the need to increase profits.

Underwriting businesses like these starts with analyzing the ratio of alcoholic beverage sales to food and non-alcoholic beverage sales. Higher alcoholic beverage sales indicate a greater exposure to liquor liability loss. The underwriting analysis should also assess other activities that may take place on the premises to encourage and increase alcohol consumption. Examples include:

Happy hour
Free drinks for women or 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 raises the risk of loss by encouraging customers to consume more.

Example: Krazees Party Towne is the city's hottest bar. It has built its reputation by featuring excellent local bands and entertainment that appeals to the twenty-something crowd who love to party. One of the most popular bands is called the Wallbangerz.

This dance band attracts a very lively crowd, and Krazees’ owner tries to book them at least twice a month because of their wild performances and successful array of gimmicks. During each set, the band features a couple of "Banger Beats." These are songs where the customers must order and finish a popular vodka drink when the song is played and before it ends.

The receipts at the end of the night reveal that drink sales soar when this band plays. Needless to say, the number of seriously inebriated customers also soars.

On the other hand, activities that promote eating food have the opposite effect. Food actually helps decrease the amount of alcohol consumed and lowers the possibility of loss because it absorbs some of the alcohol and reduces the level of intoxication and impairment.

There are ways to help control the exposure to liquor losses. Proper training is the key to controlling exposures. Here are some key areas underwriters consider when assessing a risk:

· Bartenders should monitor the number of drinks served to each table to help prevent overconsumption.

· Servers must be trained to consistently request proper identification from everyone they serve.

· Training by TIPS* or similar groups is the best way to handle customers and should be mandatory, along with establishing a clear set of procedures and adhering to them.

· Develop designated driver incentives and arrangements with local taxi companies so they are available when needed.

NOTE: TIPS is an acronym for Training for Intervention ProcedureS. This is a training program offered by Health Communications, Inc. Information on TIPS can be found at www.gettips.com.

Loss of experience and background information about the business owner is important. A key detail is the status of its liquor license and whether it has ever been revoked or suspended.

SPECIAL EVENTS LICENSES

Special events licenses are issued for specific activities or events where alcohol is served. These events typically last only a few days or hours, but the exposure risk may be greater than that of a regular business operation. Usually, special events are marked by a lack of controls or insufficient oversight, often due to the event sponsor’s inexperience in managing alcohol-related situations. The most important factor is control.

Loss exposures are minimized when the sponsor arranges for and has enough people to do the following:

Monitor the activity of attendees
Check every attendee's identification
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 handling customers who consume alcoholic beverages.

BRING YOUR OWN ALCOHOL ESTABLISHMENTS

Restaurants and other establishments might not actually serve alcohol. However, they can create an environment where alcohol consumption is not only allowed but encouraged. They may arrange non-alcoholic setups, entertainment, and other furnishings related to drinking. Covering this exposure is challenging because liability laws are not always clear about when a license is required.

It is crucial to carefully review the establishment's activities, the age of patrons, and its hours of operation. It is also vital to determine whether the insured chooses not to serve alcohol or is compelled to do so because their liquor license was revoked.

LIQUOR LIABILITY GRADES

ISO developed a scale for each state that grades the level of liability it assigns to operations that supply or sell liquor. States with lower numerical grades indicate that establishments involved with liquor or alcoholic beverages present lower risks.

0: States with this grade do not hold any party involved in supplying, selling, or vending liquor liable for injuries, property damage, or death caused by an intoxicated individual. Manufacturers, wholesalers, and distributors are always graded as 0.
1-9: States within this grade range impose varying degrees of moderate liability on parties that supply, furnish, vend, or sell liquor. Causes of action in these states can be brought against the liquor vendor for bodily injury, property damage, or death caused by an intoxicated person under specific circumstances.
10: States with this grade impose strict liability on parties that supply, furnish, vend, or sell liquor. Simply furnishing liquor in these states is considered the proximate cause of the bodily injury, damage, or death.

PRICING

Underwriters use their company's underwriting guidelines, state grades, and judgment to determine the appropriate premium for a specific risk. Some insurance companies have filed and published rates.

Licenses for special events serving alcohol are issued for specific, limited time periods. Therefore, a flat premium charge is usually applied instead of the standard rating formula. This charge should be based on the type of exposure and the state grade.

MANDATORY STATE ENDORSEMENTS

Consult the state exception pages of the ISO Commercial Lines Manual (CLM) for mandatory endorsements specific to each state.