Combine a generous amount of alcohol with exotic entertainment,shake it up and what do you get–at least as far as the insuranceindustry is concerned? The answer is the unique risks served up atbars, nightclubs and some restaurants across the country.

While these exposures might give some standard insurers aheadache, solutions can be found through wholesale brokers andexcess and surplus lines carriers who specialize in this industrysector.

The average restaurant–whetherit's a small eatery, a family-style establishment or a fine-dininglocation–doesn't fall in this category. Most are still writtenthrough the standard markets.

However, when an establishment adds a dance floor, liveentertainment, a DJ or derives more than 40-to-50 percent of itsgross receipts from the sale of alcohol, then it typically looks tothe E&S industry for coverage.

Those bars, nightclubs and restaurants that rely on alcoholsales are holding their own, reporting relatively small declines insales despite the poor economy.

Fine-dining restaurants cannot say the same, unfortunately. Theyare reporting sales down as much as 30-to-50 percent in some cases,shrinking insurable exposures for carriers of all stripes.

In addition, restaurants written by the standard markets arefacing double-digit rate increases for insurance. This has pushedsome of these risks to the E&S market, which is still reportingrelatively low rates, plenty of capacity and broad termsavailable.

There are two primary risks that differentiate bars andnightclubs from restaurants.

The average restaurant finds its most common claims when patronsslip and fall, chip a tooth while eating, or became ill aftereating.

Bars and nightclubs, on the other hand, identify assault andbattery as well as liquor as the two biggest liabilityconcerns.

In fact, about 60 percent of claims against bars and nightclubsresult from assault and battery. These claims involve patrons whoget into fights with one another or who claim the securitypeople–either staff or contracted security guards–used unreasonableforce in dealing with them.

Such claims can be expensive. Just one altercation could easilyresult in a $50,000 claim.

With the potential for assault and battery charges, theseestablishments need to beware of inexpensive general liabilitypolicies that exclude assault and battery or reduce the limitsavailable to a small fraction of the typical $1 millionpolicy–perhaps issuing a $25,000-to-$300,000 sublimit for thiscoverage.

A minimum limit of $1 million for assault and battery isrecommended–or even better, have the GL carrier include the assaultand battery coverage up to the policy limits.

Similar recommendations apply for liquor liability–as buyers arecautioned against policies that exclude this important coverage orcontain a sublimit. Again, a minimum $1 million limit for liquorliability coverage is suggested.

This coverage protects establishments from claims that theyserved liquor to a visibly intoxicated person or to a minor whosubsequently caused death or injury to third parties–those nothaving a relationship to the bar.

Coverage varies depending on the state.

In states such as Texas that have “dram shop” laws thatspecifically address these risks, the bar or nightclub is alwaysheld liable. There is no gray area.

In states such as California, however, a few more factors aretaken into account, meaning the bar or nightclub has a betterchance of mounting a defense.

In addition to having adequate liquor and general liabilitycoverage and limits, buyers and their brokers should consider anexcess or umbrella policy to further enhance coverage.

RISK MANAGEMENT

Given the potential for liquor and assault and battery claims,bars, nightclubs and restaurants are advised to use surveillancecameras inside and outside to monitor activity. This way, forexample, when a patron claims that a security guard used excessiveforce, the camera will record the behavior of the patron whoprompted the altercation.

Another risk control tool is an activity log, which bartendersand other employees can use to record the date, time and nature ofany incident, as well as a description of the patron involved.

For example, if the bar stopped serving the patron because he orshe was intoxicated, it can be documented and may be able to beused as a defense in a liquor liability claim.

Other loss control tools that should be in place include handstamps and wristbands, which help identify those eligible to drink,as well as beverage service training for both bartenders and waitstaff.

In addition, security practicesare understandably important. Carriers want to know details–such asprocedures for removing a rowdy patron, and whether the bar ornightclub employs its own security staff. If an outside agency ishired to provide security, that contractor should provide acertificate of insurance naming the establishment as an additionalinsured.

Employment practices liability insurance is another essentialcoverage that defends or indemnifies against employment-relatedsuits. Some of the most common claims are discrimination, wrongfultermination, sexual harassment, or failure to comply with statutoryhiring requirements or practices.

These claims are more frequent in restaurants, but bars andnightclubs also have the same exposures.

With respect to EPLI, more bars, nightclubs and restaurants areincreasingly requesting two very important components–wage and houras well as third-party coverage.

Wage and hour claims involve allegations that an employer hasviolated federal or state laws that govern how employees get paid.Employee claims vary from a simple miscalculation of overtime pay,to whether they took all of their mandated break times.

Most surplus lines carriers offer wage and hour coverage–alsoknown as FSLA (Fair Labor Standards Act) coverage–which provides adefense-only sublimit ranging from $50,000-to-$150,000.

Third-party coverage protects insureds for claims brought bycustomers, clients or vendors in regards to employment-relatedsuits.

Like many specialty lines, the unique risks of bars, nightclubsand restaurants are well handled by the wholesale brokers andsurplus lines carriers who specialize in this class of business andare willing to get involved and stay committed through hard andsoft markets.

With the standard markets already showing some signs ofhardening, more business is expected to move into surplus lines,where there is plenty of capacity to write these risks, as well asthe industry expertise to provide the best rates and coverageavailable.

Jeffery M. Short is vice president at PartnersSpecialty Group, a specialty lines wholesale broker. He may bereached at [email protected].