Filed Under:Agent Broker, E&S/Specialty Business

Bar, nightclub owners urged to look beyond price when seeking coverage

By Jeffery M. Short, vice president, Partners Specialty Group
Copyright National Underwriter P&C

Combine a generous amount of alcohol with exotic entertainment, shake it up and what do you get--at least as far as the insurance industry is concerned? The answer is the unique risks served up at bars, nightclubs and some restaurants across the country. While these exposures might give some standard insurers a headache, solutions can be found through wholesale brokers and excess and surplus lines carriers who specialize in this industry sector. The average restaurant--whether it's a small eatery, a family-style establishment or a fine-dining location--doesn't fall in this category. Most are still written through the standard markets.

Learn more about this issue at National Underwriter P&C

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

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

Fine-dining restaurants cannot say the same, unfortunately. They are 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 are facing double-digit rate increases for insurance. This has pushed some of these risks to the E&S market, which is still reporting relatively low rates, plenty of capacity and broad terms available.

There are two primary risks that differentiate bars and nightclubs from restaurants.

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

Bars and nightclubs, on the other hand, identify assault and battery as well as liquor as the two biggest liability concerns.

In fact, about 60 percent of claims against bars and nightclubs result from assault and battery. These claims involve patrons who get into fights with one another or who claim the security people--either staff or contracted security guards--used unreasonable force in dealing with them.

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

With the potential for assault and battery charges, these establishments need to beware of inexpensive general liability policies that exclude assault and battery or reduce the limits available to a small fraction of the typical $1 million policy--perhaps issuing a $25,000-to-$300,000 sublimit for this coverage.

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

Similar recommendations apply for liquor liability--as buyers are cautioned against policies that exclude this important coverage or contain a sublimit. Again, a minimum $1 million limit for liquor liability coverage is suggested.

This coverage protects establishments from claims that they served liquor to a visibly intoxicated person or to a minor who subsequently caused death or injury to third parties--those not having a relationship to the bar.

Coverage varies depending on the state.

In states such as Texas that have "dram shop" laws that specifically address these risks, the bar or nightclub is always held liable. There is no gray area.

In states such as California, however, a few more factors are taken into account, meaning the bar or nightclub has a better chance of mounting a defense.

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

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

Similar recommendations apply for liquor liability--as buyers are cautioned against policies that exclude this important coverage or contain a sublimit. Again, a minimum $1 million limit for liquor liability coverage is suggested.

This coverage protects establishments from claims that they served liquor to a visibly intoxicated person or to a minor who subsequently caused death or injury to third parties--those not having a relationship to the bar.

Coverage varies depending on the state.

In states such as Texas that have "dram shop" laws that specifically address these risks, the bar or nightclub is always held liable. There is no gray area.

In states such as California, however, a few more factors are taken into account, meaning the bar or nightclub has a better chance of mounting a defense.

In addition to having adequate liquor and general liability coverage and limits, buyers and their brokers should consider an excess 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 surveillance cameras inside and outside to monitor activity. This way, for example, when a patron claims that a security guard used excessive force, the camera will record the behavior of the patron who prompted the altercation.

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

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

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

In addition, security practices are understandably important. Carriers want to know details--such as procedures for removing a rowdy patron, and whether the bar or nightclub employs its own security staff. If an outside agency is hired to provide security, that contractor should provide a certificate of insurance naming the establishment as an additional insured.

Employment practices liability insurance is another essential coverage that defends or indemnifies against employment-related suits. Some of the most common claims are discrimination, wrongful termination, sexual harassment, or failure to comply with statutory hiring requirements or practices.

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

With respect to EPLI, more bars, nightclubs and restaurants are increasingly requesting two very important components--wage and hour as well as third-party coverage.

Wage and hour claims involve allegations that an employer has violated 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--also known as FSLA (Fair Labor Standards Act) coverage--which provides a defense-only sublimit ranging from $50,000-to-$150,000.

Third-party coverage protects insureds for claims brought by customers, clients or vendors in regards to employment-related suits.

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

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

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