The perils of liquor
Liability that is—producers beware
By Donald S. Malecki, CPCU
Sometimes producers have to ponder if the prospect of a commission is worth representing an insured who is not receptive to purchasing coverages deemed to be essential. To be realistic about it, of course, it would be counterproductive for a producer to turn down too many prospects who want nothing more than the basic coverages.
Yet, there are likely to be prospects who clearly are not worth the commission simply because if a claim goes unpaid, the producer will likely be the one, in addition to the insurer, to be blamed.
Can't always be avoided
In the real world, however, it is not unusual for a producer to be blamed by the insured for an unpaid claim. The producer, in fact, can count on something like this happening. What needs to be considered carefully, however, are situations where the claim is not likely to be resolved without being litigated.
Take, for example, a business involved in the sale of alcoholic beverages. Whenever an accident is alcohol-related, it usually involves a tragic event where the damages sought are extraordinarily high.
Despite this known fact, there are people in the business of selling or distributing alcoholic beverages who, instead of considering the impact of an impairment by alcoholic beverages, are more worried about what the insurance costs—until something happens. The question then is not about cost but, instead, about when protection is forthcoming.
The point here is that it might be better for a producer to avoid a prospect for liquor liability who does not want to purchase insurance. The reason is because if a claim does arise, getting the case resolved might cost the producer—even though blameless—what can amount to considerable sums involving attorney time and defense, along with court-related time, and the inability to do what the producer does best.
Case in point
While there are no shortages of alcohol-related insurance cases that could be discussed, where producers have been implicated for one reason or another, a recent one is Nationwide Mutual Fire Insurance Company, et al., v. Neetu, Inc., et al., No. 3:09-cv-2703-CMC (U.S. Dist. Ct. S.C. 2010).
Following a vehicle accident, the complaint filed by the estate of one of the decedents alleged that employees of a convenience store sold alcoholic beverages throughout the day to a customer who was already visibly intoxicated. It was alleged that these sales contributed to a single-vehicle motorcycle accident when the vehicle left the road and hit a tree resulting in the death of its three occupants.
At the time of the accident, the convenience store maintained a businessowners package policy, subject to a liquor liability exclusion excluding coverage for bodily injury or property damage for which any insured might be held liable for one of three reasons.
These reasons were (1) by causing or contributing to the intoxication of any person; (2) the furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or (3) any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.
The insurer then filed a motion for summary judgment seeking the court's declaration that it had no duty to defend or indemnify the owners. The insurer's basis for this action was founded on an express "dram shop" exclusion contained in the businessowners policy.
In the deposition of one of the owners, the testimony was that the insurance agent did not review the liquor liability exclusion with him or explain its meaning. He further stated his understanding to be that his insurance policy covered whatever might have "happened in the store."
In other words, this owner indicated a subjective belief that all potential sources of liability, including the claims at issue in this action, were covered by the policy, despite the presence of multiple, express exclusions.
The personal representative of the estate of one decedent (personal representative) quoted testimony which suggested that the insurance agent failed to draw this particular exclusion to the owners' attention. The personal representative, however, did not proffer evidence that anyone misinformed or misled the owners as to the policy's scope of coverage or meaning of this particular exclusion.
The same old defenses
About the only thing that is predictable about these liquor liability cases is that insureds and claimants will raise arguments to try and obtain coverage, despite a clear exclusion to the contrary.
One of these arguments is that the liquor liability exclusion is ambiguous because the exclusion applies only when the insured is "in the business of…selling, serving or furnishing alcoholic beverages." In other words, the exclusion is inapplicable to a convenience store because it is not primarily in the business of selling alcohol.
This argument has worked to the advantage of some businesses, such as a rod and gun club, because the sale of liquor was not considered to have a direct profit motive. In another case, a restaurant owner maintained that since its license restricted liquor sales to less than 50% of its total revenue, the liquor sales were incidental to the restaurant owner's business. This argument, however, failed.
Given these old defenses that seldom work, one would think that attorneys looking for ways to maintain an ambiguity might argue something else. An example is that an alcoholic beverage is a product and, since a business has products liability insurance, coverage for an alcoholic-related incident is covered despite a liquor exclusion.
Another argument is that since the classification of the business, for purposes of establishing the appropriate rate and premium, takes into consideration sales of alcoholic beverages, how can the liquor liability exclusion apply?
These two defenses are not likely to work, but they are an angle that may be worth trying. In fact, producers should keep these two in mind because when sued, they will be forced into looking for coverage, along with the named insured(s) and claimant(s), whether they like it or not.
Unfortunately for the owners of the convenience store, in the case in question, the courts in this state have held similar exclusions to be unambiguous and enforceable. One such case that upheld the liquor liability exclusion is Federated Mutual Ins. Co. v. Piedmont Petroleum Corp., 444 S.E.2d 532 (S.C. App. 1994), which also involved a convenience store.
As it turned out, and not unpredictably, the United States District Court for the District of South Carolina concluded that the insurer had no duty to defend or indemnify its named insureds and owners of the convenience store in the case involving the motorcycle accident and three deaths.
Despite the absence of any evidence that the agent made any statement to the store owners regarding the exclusion, the court deferred resolving the motion so as to permit the personal representative the opportunity to depose the agent. This decision of the court might have been shocking to the agent.
The court also extended the discovery deadline for this purpose and allowed the personal representative an opportunity to file an opposition memorandum after the deposition was completed. As it turned out, however, the personal representative filed a notice that he did not intend to file a supplemental memorandum, which, in effect, released the agent from any further proceedings.
Despite the accusations that the convenience store's insurance agent was at fault, there was no evidence in the final analysis suggesting that the agent misled the owner as to the existence or meaning of the exclusions.
One has to wonder how much unproductive time was spent by the producer to prove his innocence until the store owner's testimony revealed the agent to be without fault.
Attendance at trial, deposition preparation time and the actual deposition time are all costly. Moreover, these costs are not always insurable, given the high deductibles maintained by many agencies. Sometimes, too, counsel representing a producer may have to recommend some kind of settlement amount, even when the producer is blameless.
The message here is that a producer is not necessarily out of the woods simply because liquor liability insurance is purchased, because whether or not coverage applies will hinge on the facts. There are cases where named insureds have been denied coverage even when this insurance has been purchased.
When liquor liability insurance is not purchased, however, in a situation where the an entity is selling alcoholic beverages, it would be advisable for the producer to have a game plan in place because desperate people do desperate things, such as blame everyone except themselves when coverage does not apply.
Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.