December, 1993

General Liability Policies Exclude Liquor Liability

Commercial general liability policies usually contain a liquor liability exclusion, eliminating recovery under the policy for liability arising through the sale or furnishing of liquor. This exclusion frequently has been the subject of coverage misunderstandings, arguments and litigation. Who is affected by the exclusion and what activities it reaches depends upon the version of the exclusion included in a general liability policy, the laws of the jurisdiction, and how the courts of the jurisdiction have interpreted its scope.

There are different versions of the liquor liability exclusion in current use—the exclusion as it appears in the 1973 comprehensive general liability policy, the version that is a part of the basic 1986 commercial general liability policy, and the two optional variations, adopted in 1989, available for use with the 1986 general liability program.

The 1973 version is, of course, superseded by the 1986 version; however, many “long-tail” exposures are covered by the terms of that insuring contract and so a discussion of it's language remains relevant.

In 1989, ISO decided to replace the liquor liability exclusion in the 1986 liability form, but in compromise with a stand taken by the National Association of Insurance Commissioners instead provided two amendatory endorsements changing the basic policy's liquor exclusion.

Exclusion Generally Upheld

Although the liquor exclusion in general liability policies has been attacked as ambiguous, almost no courts have agreed. Examples of recent cases in which the exclusion has been upheld are: Curbee, Ltd. v. Rhubart, Pa Super Ct, 1991, 1991-92 C.C.H. (Fire & Casualty) 3341 (“it is of no consequence, in interpreting the exclusion, that the alcohol provided was consumed away from the licensed premises or that it was not directly served by an owner or employee of the restaurant. When the restaurant provided the alcohol for consumption, the exclusion was triggered. Its effect was to relieve [the insurer] of the obligation to defend or indemnify”); and Thornhill v. Houston General Lloyds, 802 SW2d 127 (Tex. Ct. Apps., 1991) (insureds argued that the suit alleged the negligent training of employees, and not the providing of liquor, as the cause of liability and that the insurer could not rely on the liquor exclusion to deny coverage; the court stated, “the defendants ask this court to construe the language of the policy such that their liability could attach as a result of some separate, additional reckless or wanton conduct and not from the sale of alcoholic beverages. Such a construction would constitute a misconstruction of the clearly worded policy terms.

Another case making a similar argument (i.e., that a separate and independent cause of action exists for “negligent supervision” of employees which is not reached by the liquor exclusion) is Kelly v. Lee's Old Fashioned Hamburgers, 896 F.2d 923 (U.S. Ct. Apps, 5th Cir.) 1990. Again, the court refused the argument, holding the liquor exclusion valid to deny coverage for the incident.

Even where the insureds argued that they requested “full coverage,” and the insurance agent had knowledge that the insured's business involved the sale of liquor, the exclusion was given full force in denying coverage for damages arising out of the sale of alcoholic beverages. “All that the agent did was to take an order for insurance. Liability for the negligent sale of alcohol is a risk for which a commercial establishment would likely want to be insured. However, an insurance customer has the responsibility to make specific insurance needs known to the insurance company.” (DeJonge v. Mutual of Enumclaw, 104 Or. App. 296, 1991 C.C.H. (Fire & Casualty) 3051.

Similarly, in Sprangers v. Greatway Ins. Co. (Wis. Ct. Apps) 1993, 1993 C.C.H. (Fire & Casualty) 4171, the court held the exclusion valid against an argument that the insurance agent had a duty to point out the exclusion in a general liability policy. The court held the agent had no such duty to advise the insured about the exclusions in the absence of a request.

Effect of the Exclusion

All the versions of the exclusion eliminate coverage where the insured has caused or contributed to the intoxication of any person, has furnished alcoholic beverages to a minor or an already intoxicated person, or due to the violation of any statute or regulation pertaining to alcoholic beverages. The part of the exclusion that varies among the versions is to whom the exclusion can be made to apply. This is discussed subsequently under “Liquor Exclusion—Who Is Affected?”

It is because the exclusion is tied to statutes and regulations, and in some instances, the principles of common law, that the scope of the exclusion varies in different jurisdictions.

The problem stems from three factors: (1) dram shop acts of some states impose specific statutory liability upon businesses in the alcoholic beverages industry; (2) alcoholic beverage control laws of other states create liability under certain circumstances in absence of dram shop laws; and (3) common law liability or liability imposed in the absence of specific statutory treatment. In any circumstances, the liquor liability exclusion is broad enough to eliminate coverage in the situations in (1) and (2), and, depending upon the circumstances, in (3).

What may be a statutory violation in one state may not be actionable in another. This leaves insureds even tangentially connected to manufacturing, distributing, selling, or serving liquor with serious questions about their liability insurance coverage, and perhaps a need for separate liquor liability insurance. See “Liquor Liability Policy”, Casualty & Surety, Public Liability pages for a discussion of this coverage.

Dram Shop Acts

Dram shop acts, or “civil damage acts,” give persons a civil right of action against providers of alcoholic drinks when they are injured or their property damaged through the actions of an intoxicated person or a minor. As will be shown, some statutes also give a right of action when a person's source of support is reduced or eliminated. The dram shop acts of different states vary in assessing liability, some narrowly defining causes, actions, and damages, and others more broadly so.

(Another type of Civil Damage Act, discussed subsequently in “Statutes Avoiding Liability,” legislatively enacts the common law principle that it is the consumption, and not the sale or furnishing, of liquor that is the legal cause of liquor-related incidents and damage. This puts the responsibility for damage on the intoxicated person, and not on the person furnishing the liquor. Exceptions are common where liquor is furnished to a minor or visibly intoxicated person.)

An example of the traditional Dram Shop Act is Connecticut's (CT Gen. Stat. 30-102), stating that any person who “by himself or his agents” sells any alcoholic beverages to an intoxicated person is liable for damages to injured third parties in an amount up to $20,000 per person and $50,000 aggregate.

The dram shop act of Colorado (Colo. Stat. 13-21-103) imposes no restrictions on the amount of damages, and provides that the unlawful sale of alcoholic beverages works a forfeiture of all rights of a renter under any lease or contract on the premises. However, the act applies only to sales to habitual drunkards and specifies that no liability can attach unless a spouse, child, parent, guardian, or employer has first notified the vender not to sell to that party. It is interesting to note that Colorado, in its Alcoholic Beverage Control Act (Colo. Stat. 12-47-129), specifically embraces the consumption and not the sale of alcohol as the legal cause of damage, and limits liability to furnishing alcohol to minors or visibly intoxicated persons. Like Colorado, many states create a cause of action against liquor vendors where liquor is served to minors and visibly intoxicated persons.

Illinois has a very broad liquor control act (235-ILCS-5/6-20). It gives a specific cause of action to any person injured in person or property against any licensed seller of liquor, who, through sale or furnishing, causes the intoxication of a person. This act also creates a cause of action against anyone 21 or older who rents a hotel room knowing the room will be used for under-aged drinking in favor of persons injured by intoxicated underage drinkers.

An important variation in dram shop laws for insurance professionals dealing with landlords of premises where alcoholic beverages are served is also illustrated by the Illinois dram shop law. This act allows any person owning, renting, leasing, or permitting the occupation of any premises used for the sale of alcoholic beverages to be held liable along with operators of such premises. Note that of the various versions of the liquor exclusion, only the exclusion as included in the 1973 CGL would eliminate coverage for owners or lessors of liquor-related businesses; the later versions have been revised on this point.

Not every person who suffers injuries or damages directly or indirectly as a result of an intoxicated person's actions has a right of action; it depends upon the provisions of these acts. Some acts specifically state that only the injured person, his or her spouse, and children are eligible, while others also add the parent, guardian and sometimes even the employer of the insured person. The broadest type of provision gives every person a right of action for bodily injury, property damage, or loss of support.

It should be noted, however, that dram shop acts were not devised for the benefit of the intoxicated person who is injured as the result of his own acts. However, a few jurisdictions have allowed such actions under common law negligence principles; (“Recovery by Intoxicated Persons,” below).

A Connecticut case upholding this intent is Nolan v. Morelli, 226 A.2d 383 (1967). This involved an action by a woman who sought to recover damages for the death of her intoxicated husband, killed in a one-car accident. She claimed that the death of her husband was caused by his intoxication which, in turn, was caused by the restaurant owner's sale of liquor to him.

By its terms, the civil damage act of that state authorizes recovery when a person is injured or his property is damaged by an intoxicated person. But the supreme court of that state held that the law does not authorize recovery for injuries or damages sustained by the intoxicated purchaser. Since the decedent had no cause of action under this act, there was none that could pass to his administratrix.

The Nolan holding was followed by the Delaware supreme court in Wright v. Moffitt, 437 A.2d 554 (1981), a case in which a patron attempted to recover from a tavern keeper for injuries caused through his own intoxication. The patron argued that the court should reevaluate the traditional stand on this issue and impose liability as an expansion of the law. The court held that if such an expansion was desirable, it should be the legislature that should do so.

As noted, there are some dram shop acts that permit a person a right of action when means of support are lost. In these jurisdictions it is sometimes possible, therefore, for the intoxicated person's spouse or the minor's parent to obtain a right of action against those responsible for causing or contributing to the intoxication of that person. For example, the dram shop act of Michigan (Mich. Stat. 436.22) states in part: “Every wife, husband, child, parent, guardian or other persons who shall be injured in person or property, means of support or otherwise, by an intoxicated person by reason of the unlawful selling, giving or furnishing to any such persons any intoxicating liquor, shall have a right of action in his or her name against the person who shall by such selling or giving of any such liquor have caused or contributed to the intoxication of said person or persons or who shall have caused or contributed to any such injury.”

This right—given to those persons specified under the dram shop acts—generally lies against the operator of the business where alcoholic beverages are given, served, or sold, and sometimes upon the owner or lessor of such premises. The fact that an employee or agent of the operator may have served the alcohol does not relieve the operator of ultimate responsibility. In some states, only the person who causes the intoxication of another is held liable. All versions of the CGL liquor liability exclusion are broad enough to eliminate coverage in this situation.

There is still another important provision of dram shop acts that affects a person's right of action. Some statutes hold a liquor vendor accountable regardless of how much the sale may have contributed to a person's intoxication. In these states, it matters little how much liquor is served to a person; the statutes permit rights of action against any person who contributes to or causes the intoxication of a person. Other statutes allow suits only when the vendor's sale of liquor causes a person's intoxication.

Obviously, the laws involving those who contribute to the intoxication of a person are much broader than those permitting actions against those who cause the intoxication. Several liquor businesses can become involved in a single incident if “contribution” is the key word. For example, if a person consumes alcoholic beverages in two or more liquor establishments during an evening, the operators of all these businesses can be held responsible for contributing to the consumer's intoxication. It does not matter, in this situation, what the consumer's condition is during the time the liquor is furnished or the amount of liquor consumed at each of these locations.

The provision of the other acts, on the other hand, holds only that vendor responsible who serves the beverage that is considered to have ultimately caused the intoxication. It does not matter how many establishments are visited by the consumer—it is the last location where the consumer is considered to have become intoxicated that is important. It is not impossible, however, for several establishments to be involved, especially when the vendor causing the intoxication is not clearly evident.

When the act holds a vendor accountable whether he contributes to or causes the intoxication of a person, there is no need for singling out the responsible party; all person or organizations furnishing liquor are usually involved.

Statutes Avoiding Liability

Some states, such as Colorado, discussed previously, have adopted a different view from the dram shop acts previously discussed. California, in legislative reaction to court cases holding liquor vendors liable for injuries to third parties by intoxicated patrons, has embodied into state law the common law principle that it is the consumption of alcoholic beverages and not the selling or serving that is the proximate cause of injuries, hence severely limiting alcoholic beverage liability in that state. Persons who sell or furnish alcoholic beverages to any habitual or common drunkard or to any obviously intoxicated person are guilty of a misdemeanor. However, the law goes on to state that no liquor vendor is civilly liable to any injured person or the estate of such person for injuries inflicted on that person as a result of intoxication by the consumer of such alcoholic beverage.

Alaska has taken basically the same stand. In that state an alcoholic beverages provider may only be liable to another person if liquor is served to a person under the age of 19 or are provided to a “drunken person.”

As can be seen from the variations in states' dram shop acts, liquor liability exposures will differ, and insurance professionals must make themselves aware of the regulations in their territories as these relate to insureds and prospective insureds.

Alcoholic Beverage Control Acts

Many states do not have dram shop acts. Instead they have statutes, ordinances, or regulations dealing with alcoholic beverage control. These generally prohibit the sale or gift of liquor to a minor, a habitual drunkard, or to an intoxicated person. Some are even less specific. These states do not automatically give persons injured by intoxicated patrons a civil right of action against the server or seller that provided the alcoholic beverages. Instead, they provide criminal penalties against the operator, and in some cases the owner, of the premises where the sale or serving occurred.

Therefore, in the absence of dram shop acts, it is still possible to impose liability upon liquor vendors. However, most statutes, ordinances, and regulations dealing with alcoholic beverage control are either limited in scope or conditions and sometimes both. For example, the regulation of West Virginia merely states that it is unlawful to sell, give away, or permit the sale of intoxicating liquor to any minor. The acts of some jurisdictions, on the other hand, add sales to intoxicated persons or habitual drunkards along with minors as a criminal act.

Owner of Premises—Responsibility

Owners and lessors of premises where liquor businesses are conducted by others also are sometimes affected by dram shop acts and alcoholic beverage control laws. This is important to insureds because as the liquor liability exclusion appears in the 1973 comprehensive general liability policy, owners and lessors of premises where alcoholic beverages are involved also fall subject to the exclusion if liability arises out of the violation of any alcoholic beverages statute or regulation. As previously mentioned, this part of the exclusion was omitted from the 1986 commercial general liability policy, thereby providing coverage for owners or lessors who are not also operators of such premises.

Basically, there are two reasons behind holding an owner liable: (1) the owner of a premises is, or should be, aware of the type of business conducted thereon and should be just as responsible as the operator of such business; and (2) the owner becomes another recourse for the person who is unable to collect damages from the operator of the business that caused or contributed to the intoxication of a person.

Whether a property owner can be held severally liable or jointly liable with the liquor business operator can only be answered by the provisions of these acts. In any event, a suit against a property owner or lessor is not usually permitted unless there is evidence of guilt on the vendor's part, too.

This whole problem of involving the owner or lessor of premises in such suits can sometimes be avoided. This is accomplished by requiring the operator of the liquor business—lessee or tenant—to assume all possible liability of the owner or lessor including that stemming from violations of the dram shop act. But unless there is a statutory provision specifically dealing with owners or lessors of such premises, the liability of such persons—at common law, for example—is covered because the liquor liability exclusion in the 1973 CGL only eliminates an owner's or lessor's coverage in the event liability is assessed because of a violation of a liquor statute or regulation. Under the 1986 CGL, insureds that are owners and lessors of premises used for alcoholic beverages operations—but who are not themselves involved in the business—are not subject to the exclusion.

Common Law Liability

It is common for courts to hold sellers of liquor liable under the principles of common law negligence. Most of these cases at common law are from states that do not have dram shop acts or alcoholic beverage control laws, but also of great importance are those cases emanating from states that have had alcoholic beverages control acts, or dram shop acts but repealed them. In this latter situation, the consensus of the courts seems to be that the repeal of dram shop acts does not abrogate such common law principles.

This points to a shift in common law interpretation. For years, the common law held that a person who was injured or whose property was damaged by an intoxicated person had no cause of action against the person who furnished the liquor. The reasoning behind this rule is that the consumption of liquor is the proximate cause of injuries or damages sustained and not the sale of liquor. In other words, a person cannot become intoxicated when served liquor, unless he consumes it. Injuries or damages caused by the actions of an intoxicated person, therefore, stem from the person's voluntary consumption of alcoholic beverages—and not the sale.

Over the years, however, many courts have permitted suits against liquor vendors—in absence of dram shop acts—based upon the principle of common law negligence: there is negligence when a reasonably prudent person fails to recognize and foresee the likelihood of harm or danger to others. Thus, when an operator of a liquor business gives, sells, or serves alcoholic beverages to a person who is visibly intoxicated or to a person he knows or should know from the circumstances is a minor, the vendor should recognize and foresee the possible harm that can be caused through the actions of this intoxicated person or minor.

One of the earlier and leading cases on this point is Rappaport v. Nichols, 156 A.2d 1 (1959) decided by the New Jersey supreme court. Since this state repealed its dram shop act in 1934, the decedent's estate based its claim upon common law. In the case, an 18-year-old boy was involved in a collision in which a man was killed. His estate sued the boy and the four taverns charging that the minor had visited them before the accident. He was served liquor in spite of knowledge that he was a minor. The sales, therefore, were illegal and the accident occurred because the minor had become intoxicated due to this illegal conduct. The tavern owners argued that assuming their conduct was unlawful and negligent, it was, nevertheless, not the proximate cause of the injury suffered.

The supreme court of this state held, however, that if the tavern keepers unlawfully and negligently sold alcoholic beverages to a minor, causing his intoxication which in turn caused or contributed to his negligent operation of a motor vehicle—at the time of the fatal accident—a jury could find that the decedent's death resulted from the negligence of the tavern keepers. Such negligence, therefore, was the substantial factor in bringing it about. Also, the minor's negligent operation of a motor vehicle was a risk the tavern keepers created or an event that they could reasonably have foreseen. Hence, the proximate causal relations between the sellers' unlawful, negligent conduct and the decedent's death is a question for the jury. Today, this is the view of the majority of jurisdictions.

Courts have limited liability imposed in this fashion to injuries that could be reasonably foreseen by the liquor server. For example, the cases discussed above involved injuries caused by intoxicated patrons driving automobiles shortly after being served alcohol by the defendant. This is because it is reasonably foreseeable in the modern world that patrons arrive at and depart from taverns in automobiles. Courts have also held tavern keepers liable for assaults on a patron by another intoxicated patron in Pierce v. Lopez, 490 P.2d 1182 (1982). In Herbert v. Club 37 Bar, 701 P.2d 847 (Ariz. Ct. of Apps., 1984), the court refused to extend liability to a tavern keeper for a murder committed by an intoxicated patron shortly after drinking in the defendant's bar.

Some courts have extended the common law negligence theory to social hosts; see “Actions against Social Hosts,” which follows.

Recovery by Intoxicated Persons

As mentioned previously, dram shop acts, as a general rule, do not give an intoxicated person a cause of action against a liquor vendor for injuries he sustains because of his own acts. But, suit is sometimes permissible at common law.

A case in point is Schelin v. Goldberg, 146 A.2d 648. This case arose in Pennsylvania in 1958, seven years after this state repealed its dram shop act. The injured person was the customer himself—not an innocent third party. He entered a tavern in an intoxicated condition and was served liquor. He was subsequently injured in a fight with another person. He recovered a judgment against the tavern keeper for these injuries—not because of a dram shop law, but because the supreme court of this state held that the tavern operator had breached a duty owed by selling the injured person liquor when he was intoxicated. In other words, the court held that the tavern operator had a duty to protect a customer. One of the arguments on behalf of the tavern operator was that recovery should not be permitted because of the injured person's contributory negligence. The court ruled that recovery is not barred by contributory negligence. (Note, however, that states have widely differing positions on contributory and comparative negligence that would affect the outcome of such a case in various jurisdictions.)

A similar ruling was made by the Louisiana supreme court in Pence v. Ketchum, 326 So. 2d 831 (1976). In the case, a patron of a bar was struck by an automobile after being ordered to leave the bar at closing time in an intoxicated condition. The court held that the owner of the bar breached both the statutory duty as a retailer to refrain from serving an intoxicated person (Louisiana has an alcoholic beverages control act) and the duty that a business owes a patron to avoid affirmative acts that increase the peril to intoxicated persons. The bar owner, who was aware of the patron's condition, failed to act to avoid foreseeable harm.

Pence was subsequently overruled in part by Thrasher v. Johnny Leggett's Cajun Country, 373 So.2d 496 (Ala. Sup.Ct., 1979). This was a case where an intoxicated person was served liquor, became overly aggressive and was removed by a bouncer for the club and became injured. The holding of Pence was that a liquor retailer's sale to an already intoxicated person in violation of the state's alcoholic beverage control law gave rise to an action by the injured patron. Thrasher restricts this decision, holding that there should be no absolute liability on the part of the vendor for an intoxicated patron's injuries, but that such an action can arise in the appropriate circumstances. In Pence, the barkeeper's affirmative action that gave rise to liability was evicting the intoxicated patron at closing time; in Thrasher, the intoxicated patron's own aggressive behavior was held to be the cause of his injuries.

Contrary to the general rule of nonrecovery for the intoxicated person's injuries to himself, a few jurisdictions have found liability in just such situations. In Sager v. McClendon, 650 P.2d 1002 (1982), an Oregon court construed the dram shop act language to permit recovery by an intoxicated person for his own injuries. The statute provides that “No licensee . . . is liable for damages incurred or caused by intoxicated patrons . . . unless the licensee . . . has served or provided the patron alcoholic beverages when such patron was visibly intoxicated.” The court stated, “We read the language to mean exactly what it says, namely, that licensees or permittees are liable both for damages 'incurred' by intoxicated persons as well as damages 'caused by' intoxicated persons.”

Courts may also be more apt to hold tavern keepers liable for damages to the intoxicated person when the person is a minor. Such was the outcome in New Mexico in Porter v. Ortiz, 665 P.2d 1149 (1982) and in Arizona, Ontiveros v. Borak, 667 P.2d 200 (1983).

Common Law Recovery Denied

As previously stated, the early general rule in states without statutory schemes assessing liability on liquor vendors was that there can be no cause of action against a liquor vendor for unlawful sale that, in turn, causes the intoxication of a person. This stance was generally based upon the general rule that consumption of liquor and not its sale is the proximate cause of injuries occasioned through intoxication.

Today this is the minority position. Only the states of Arkansas, Delaware, Georgia, Maryland, Nebraska, and Nevada adhere to this viewpoint.

Liquor Exclusion—Who Is Affected?

The exclusion in the CGL policy eliminates coverage for insureds that are “in the businesses” of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages. The exclusion eliminates coverage for incidents of bodily injury or property damage that any insured may be held liable for because of: (1) the 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; and (3) the violation of any statute, regulation, or ordinance relating to the sale, gift, distribution, or use of alcoholic beverages.

The liquor liability exclusion in the 1986 CGL expressly states the exclusion only applies to those insureds involved in the alcoholic beverages industry. The exclusion in the 1973 CGL differs in this regard. Also included in the scope of the 1973 exclusion are owners or lessors of premises used for alcoholic beverages operations, if liability is imposed because of a violation of a liquor statute or ordinance (this provision does not appear in the 1986 version of the exclusion).

The exclusion applies principally to those engaged in the alcoholic beverage business. Manufacturers, wholesalers, and retailers of these beverages are examples. As to those in the business of serving or furnishing alcoholic beverages, a caterer is a frequently cited example. As already stated, owners or lessors of premises where liquor business is conducted may also be affected by the exclusion in the 1973 CGL. Whether owners or lessors come within the scope of this exclusion depends upon whether they can be held liable because of a violation of any statutory provision—dram shop act, regulation, or ordinance. This exclusion does not reach owners or lessors of premises for any action stemming from common law negligence.

These general classes or persons or organizations—businesses selling or serving alcoholic beverages and, under the 1973 CGL, owners or lessors of such premises—are without coverage under liability policies when they are in violation of any statute, ordinance or regulation. Since the exclusion refers to “any statute,” this policy excludes violators in states that have dram shop acts, as well as those having only alcoholic beverage control acts.

Whether any statute, ordinance, or regulation dealing with alcoholic beverages is violated, of course, depends upon the wording of that provision. Most dram shop acts leave little room for argument, but alcoholic beverage control acts usually are not as comprehensive—they apply to those who sell, serve, or give liquor to minors, to habitual drunkards, and, sometimes, to intoxicated persons.

Even so, there are times when an alcoholic beverage control law is not violated but a cause of action in common law negligence is still possible. And for those in the business of selling or serving alcohol, if liability is attached because of the insured's negligence in causing or contributing to the intoxication of a person, the exclusion is broad enough to bar coverage even in absence of statute.

A case in point is Mitchell v. Ketner, 393 S.W.2d 755 (1964). This is a Tennessee case that involved an appeal by a tavern owner against a favorable ruling for the estates of persons killed in a Sunday automobile collision with an automobile driven by an intoxicated person who was served by this tavern keeper. The only statutory violation was one that prohibited the sale of intoxicants on Sunday. The Tennessee court of appeals held that there was insufficient evidence that the deaths were proximately caused by the negligent sale of alcoholic beverages to persons who could reasonably have been anticipated to inflict injuries upon third persons. The court did hold, however, that there was a cause of action in common law negligence. Apparently the liquor liability exclusion could encompass cases of this type, i.e., no coverage “by reason of the furnishing of any alcoholic beverages . . . to a person under the influence….”

Another case emphasizing the point that a cause of action in common law negligence is still possible even though an alcoholic beverage control act is not technically violated is the Ohio case of Mason v. Roberts, 294 N.E.2d 884 (1973). This case arose when a customer, who is related to the tavern owner, allegedly caused the death of another customer after being served liquor by an employee at the tavern until he was intoxicated.

The tavern owner argued that she did not receive notice, actual or constructive, of an order from the state liquor department prohibiting the sale or gift of intoxicating liquor to that person. She also argued that his name did not appear on any such list.

Although both of the courts agreed that no action arises under the liquor act unless the name of a habitual drunkard appears on a list, they also held that if such precludes a cause of action, it would defeat the purpose of the act. (The purpose of such lists is to increase public protection.) The supreme court, in holding for a cause of action in spite of the fact that the intoxicated person's name did not appear on a statutory list, stated that the tavern owner should have known or, in exercising reasonable care, should have realized that the person to whom liquor was sold would become violent upon becoming intoxicated.

This case bears out the point that, while the need for liquor liability insurance is of less concern in a state that has a limited liquor law or in which the courts have upheld the common law interpretation of no liability on seller or server, there is still a degree of uncertainty on how a court may rule in a given circumstance in a future case.

There are a few states, as previously mentioned, that do not have dram shop acts or other statutes or have not held a vendor liable under common law. A common question involving states in this category concerns the effect this liquor liability exclusion has on a liquor vendor. Until the legislators of such states enact dram shop acts or other statutes, or the courts of such states sustain actions at common law, it appears that this exclusion is of little concern. On the other hand, there are some states that have limited liquor statutes, but continue to follow the common law interpretation of non-liability.

There is no way of determining when a court might decide to sustain a case in common law negligence in one of these states. If and when it does, the expenses of defense and the judgment award pose a potentially severe burden to anyone engaged in the liquor business.

1989 Liquor Exclusion Endorsements

A common problem of interpretation of the CGL liquor liability exclusion contained in the 1986 policy is deciding what is, and what is not, being “in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages,” because the exclusion applies only to insureds so engaged “in the business.” (See “Other Coverage Aspects,” below, for a review of this issue.)

In order to remove the uncertainty connected with this phrasing, Insurance Services Office (ISO) has developed two optional endorsements, CG 21 50 and CG 21 51. These endorsements are optional at the insurer's discretion.

CG 21 50 is titled “Amendment of Liquor Liability Exclusion.” There is no change in the acts that trigger the exclusion: coverage is eliminated if the insured causes or contributes to the intoxication of any person; furnishes liquor to a minor or a person under the influence of alcohol; or if liability is assessed through statutory scheme.

The major revision in the amendment relates to whom the exclusion applies. ISO has written the endorsement with the intent of clarifying that one does not have to be engaging in a licensed activity or operating with a profit motive to fall under the exclusion. The often litigated phrase “in the business of” is eliminated. Instead, the exclusion applies only if the insured (1) manufactures, sells, or distributes alcoholic beverages, (2) serves liquor for a charge, regardless of whether or not the activity requires a license or is for the purpose of financial gain, or (3) serves liquor without charge, if a license is required for such an activity.

It is possible that the word “distribute” as used in the amended exclusion could cause confusion regarding coverage in a given situation. For example, can an insured be said to be “distributing” liquor for purposes of triggering the exclusion if beer is served at a company picnic? The phrase must be looked at in the context of surrounding language. As “distribute” is used in context with “sell” and “manufacture,” a commercial connotation is apparently contemplated, and the insured-employer serving drinks at a company social function—without charge—would not be affected by the exclusion. This is further bolstered by the apparent distinction the drafters of the endorsement made between the word “distribute” in one section of the exclusion and “serve” in another. However, if the employer makes a charge for the alcohol, or sponsors a company social function with a “cash bar” the exclusion could be used to avoid coverage.

Endorsement CG 21 51 is identical to CG 21 50, with the exception that this version makes provision for excepting scheduled activities from the scope of the exclusion. To be covered, specific activities that would normally fall under the exclusion may be listed in the endorsement or the policy declarations as exempt from the liquor exclusion.

Liability Arising from Business Entertaining

The question is often raised regarding whether a person, institution, or business insured under a CGL needs special insurance against liability arising out of business entertaining. The issue is important because courts are now more likely than in the past to impose liability on liquor providers, even hosts at purely social events, under negligence principles.

Insureds, therefore, should be made aware of the exposure that can be present where the insured provides alcoholic beverages in a business-social setting, such as a company Christmas party, summer picnic or other gathering. The facts that could lead to an employer's liability are similar to the situation of the liquor retailer: the employer provides liquor to an intoxicated client or employee, the employee proceeds to drive away from the company outing subsequently injuring a third party, and the employer is found to be liable under principles of common law negligence.

Where alcoholic beverages are provided without a charge of any kind, there is no exclusion in the CGL policy that would eliminate coverage in this situation. Entertaining customers with alcoholic drinks or providing beer at a company picnic is not equivalent to being engaged in the business of selling or serving alcoholic beverages.

However, the issue is not so clear where the business or institution, such as a university or volunteer fire department, sells alcoholic beverages at special events or even makes an admission charge to events at which alcoholic beverages are available. For coverage purposes under the basic 1986 CGL, are these insureds then, albeit limitedly, “in the liquor business?”

The answer is more clear in the 1989 amendatory endorsements. Liability arising out of incidents where the insured serves liquor for a charge is excluded, and is not excluded where no charge is made, if no license is required for the activity.

As to the assessment of liability in these situations, courts have generally kept dram shop acts and the like narrowed to those active in the liquor business and usually have allowed social hosts the common law defense of consumption, not serving, as proximate cause. However, there is some movement in the other direction (see the New Jersey decision in Linn, below.)

In Miller v. Owens-Illinois Glass Co., 199 N.E.2d 300 (1964), an employee who was apparently intoxicated from beverages served at a company sponsored picnic was involved in an automobile accident resulting in injuries to other persons. In the suit against the employer and an employee association, the injured persons sought damages under the dram shop act of Illinois arguing that the serving of liquor under the circumstances made them liable. However, the court held that the company was not engaged in the liquor business, and therefore was not subject to provisions of the state's dram shop regulations.

An appellate court affirmed the decision, holding that the dram shop act applied only to those actually in the liquor business; the law was not intended to include social drinking of intoxicating beverages. This reasoning was later upheld in another Illinois appellate court case, Camille v. Berry Fertilizers, Inc., 334 N.E.2d 205 (1975).

In Edgar v. Kajet, 375 N.Y.S.2d 548 (1975) the supreme court of Nassau County, New York dismissed all complaints against Avis, Inc. The firm had given a party at which liquor was served; an employee had allegedly become intoxicated and was subsequently involved in an automobile accident in which a third party was injured. The court refused to expand the dram shop act, stating disbelief that the legislature ever intended that the act should apply to social drinking and the giving of intoxicating liquors at social events. This finding was upheld in 1987 in D'Amico v. Christie, 518 N.E.2d 896 (NY Ct. of Apps.)

A New Jersey appeals court has found a business liable for damages sustained after an employee became intoxicated at an office party and caused a fatality in a subsequent auto accident. In Davis v. Sam Goody Inc., 480 A.2d 212 (1984) the court decided, “It is abundantly clear to us that liability in this state depends not on the nature or character of the supplier of the alcoholic beverage nor on whether the tortfeasor is a minor or an adult. Rather, liability depends upon the 'conventional negligence analysis' respecting foreseeability.”

In Congini v. Portersville Valve Company, 470 A.2d 515 (1983), Pennsylvania recognized a common law cause of action based on negligence against a company hosting a Christmas party for employees for injuries sustained by a minor employee who became intoxicated at the party and subsequently drove his car into the rear of another vehicle. The decision is also noteworthy in that the court allowed recovery by the minor for his own injuries, and not solely for injuries sustained by a third party.

“In the Business” Under the CGL

Under the exclusion as it appears in the 1973 CGL or the basic 1986 CGL policy without the optional exclusionary endorsements, in cases where alcoholic beverages are only tangentially related to the insured's business—such as a company picnic where a cash bar is provided, or at a political fund raiser where profits from alcoholic beverages are involved—insurance coverage will turn on the definition applied to the term “in the business of.” Because the term “business” is not defined in the policy, disputes have arisen as to what constitutes being “in the business of manufacturing, distributing, selling, serving or furnishing” alcoholic beverages.

The relevant language was revised slightly in the 1986 CGL liquor liability exclusion. The 1973 exclusion affected persons or organizations “engaged in the business of manufacturing, distributing, selling, or serving alcoholic beverages” The 1986 simplified language liquor liability exclusion applies “if you are in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.”

In the case of Heritage Insurance Company of America v. Cilano, 433 So.2d 1334 (1983), the insured argued that because his license restricted liquor sales to 49% of the restaurant's total revenue, alcoholic beverages were only “incidental” to the overall operation, and that the policy is ambiguous on this point.  The court decided in favor of the insurance company. It ruled that coverage is extended to functions incidental to the insured's business unless that business is the manufacturing, selling, distributing, or serving of alcoholic beverages. Since the insured admitted to being in the business of liquor sales, he was not covered. Further, the court held were it to accept that some portions of the liquor provision are ambiguous, such ambiguity would be irrelevant because all functions of an insured who distributes, sells, or serves alcoholic beverages are excluded, not merely those incidental to his business.

The liquor liability exclusion—as it appears in the 1973 CGL policy—was held to be ambiguous in Laconia Rod and Gun Club v. Hartford Accident and Indemnity Company, 459 A.2d 249 (NH, 1983), and the case decided against the insurer. In this case, a patron alleged the club had breached its common law duty by serving her alcoholic beverages until she became intoxicated and allowing her to leave the premises without knowing whether she was properly escorted. As a result, she fell and was injured.

The club requested the insurer to provide a defense in the action but the insurance company denied liability, relying on the liquor exclusion. The insured sued arguing the exclusion is inapplicable because the club is not “in the business of” selling or serving liquor as used in the exclusion, as it did not make a profit as would a tavern.

In its decision, the court stated, “the meaning of the phrase 'in the business of' is ambiguous. Corpus Juris Secundum states that the word 'business' can be used in two senses. It can be used in a broad sense to mean any regular activity that occupies one's time and attention, with or without a direct profit motive, or it can be used more narrowly to mean an activity with a direct profit objective. Because the phrase 'in the business of' is ambiguous, we must interpret it in favor of the club and hold that the club is not 'in the business of' selling alcoholic beverages.”

As a result of Laconia, ISO issued a New Hampshire amendatory endorsement—GL 01 55—that changed the liquor liability exclusion to exclude the “selling or serving of alcoholic beverages for a charge regardless of whether the insured . . . . is in the business of making a profit from the selling or serving of such beverages.” Note that this exclusion, offered specifically to clarify the intent of the policy drafters not to cover losses of the Laconia type, closely resembles the wording of the 1989 exclusionary liquor endorsement. The exclusion applies if the insured furnishes liquor for a charge whether or not such activity requires a license or is for the purpose of financial gain.

In Sprangers v. Greatway Ins. Co. (Wis. Ct. Apps) 1993, 1993 C.C.H. (Fire & Casualty) 4171, a nonprofit organization argued that the term “in the business” is ambiguous, and therefore could not be relied upon to deny coverage. The court stated that a VFW hall “operates exactly as any other bar or tavern would, with the exception of the use of the tavern's profits. The destination of profits, or even the existence of profits, is irrelevant to the parties of the insurance contract.”

Actions Against Social Hosts

Traditionally courts have been reluctant to recognize a right of action against social hosts, relying in social settings on the older common law principle that it is the consumption and not the serving of alcoholic beverages that is the proximate cause of liquor-related incidents. However, social concern with the problem of intoxicated drivers has caused a few jurisdictions to re-evaluate their position.

An example of a case where the court refused to recognize a right of action against social hosts is Westcoat v. Mielke, 310 N.W.2d 293 (Mich. 1981).  A Michigan appellate court declined recovery in an action against a social host for providing alcoholic beverages and then ejecting the guest. The guest alleged that he was injured in a one-car accident after becoming visibly intoxicated at the home of the host, and the host forced him to leave by automobile. The court held that recovery was exclusively statutory, and that liability under the dram shop act was limited to liquor retailers.

The Pennsylvania supreme court considered the issue and refused to extend liability to the social hosts that served alcoholic beverages to an intoxicated adult guest prior to his involvement in an automobile accident. The common law cause of action was based on the alleged negligence on the part of the hosts in not foreseeing that the visibly intoxicated guest would drive. The court in Klein v. Raysinger, 470 A.2d 507 (1983) reviewed cases from several jurisdictions. While it acknowledged that a few states had found social hosts liable for injuries caused by intoxicated guests, “the great weight of authority supports the view that in the case of an ordinary able man it is the consumption of the alcohol, rather than the furnishing which is the proximate cause of any injury.”

In addition, the Klein court pointed out that several jurisdictions, including California (a state where the high court had found a social host liable) and Minnesota had legislatively resolved the question by enacting statutes preventing liability to be passed to social hosts (except, as will be noted, in the case of social hosts serving liquor to minors).

New Jersey is a state that has found a cause of action against social hosts for damage caused by intoxicated adult guests. In Kelly v. Gwinnell, 476 A.2 1219 (1984), the New Jersey supreme court ruled that a social host who provides intoxicating liquor to a guest knowing that guest to be intoxicated, and knowing that the guest will soon drive, is liable for injuries inflicted on a third party as a result of the negligent operation of a motor vehicle by the guest.

The court noted that New Jersey has no dram shop act imposing specific liability, “and that while decisional law had imposed such liability on licensees, common law liability had been extended to a social host only where the guest was a minor.” Nevertheless, the court held the test for a cause of action under common law negligence had been met. “Defendant provided his guest with liquor, knowing that thereafter the guest would have to drive in order to get home. One could reasonably conclude that [the social hosts] must have known that their provision of liquor was causing Gwinnell to become drunk, yet they continued to serve him after he was visibly intoxicated. A reasonable person could foresee quite clearly this continued provision of alcohol was making it more and more likely that Gwinnell would not be able to operate his car carefully. [The social host] could foresee that unless he stopped providing drinks Gwinnell was likely to injure someone as a result of the negligent operation of his car. The usual elements of a cause of action for negligence are clearly present.”

However, a New Jersey appeals court ruled in Griesenbeck v. Walker, 488 A.2d 1038 (1985) that social host liability does not extend to all accidents. This case concerned an action brought by a granddaughter against her grandparents. The granddaughter's mother, already intoxicated, had been served alcoholic drinks by the grandparents. She subsequently drove home and accidentally left a burning cigarette on the sofa, causing a fire that killed her, her husband, and an infant son. The court concluded that, besides the fact the accident did not involve a motor vehicle, a reasonable person could not conclude the serving of the alcohol would result in the fire.

Social hosts have also been held potentially liable for alcohol-related incidents in Indiana. In Ashlock v. Norris, 475 N.E.2d 1167 (1985), an Indiana court of appeals interpreted a state alcoholic beverage control statute to allow a cause of action against a man who had purchased drinks for a woman in a tavern, allegedly causing her intoxication, who subsequently ran over and killed a jogger. The law provides “It is unlawful for a person to sell, barter, deliver, or give away an alcoholic beverage to another person who is in a state of intoxication if the person knows that the other person is intoxicated.” While recognizing that the great majority of cases tried under this statute were against commercial vendors of liquor, the court stated that the legislature had chosen to draw no distinction between one who sells in violation or one who gives away liquor in violation of the statute.

However, illustrating that the law is not settled in this area, another Indiana district court of appeals considered the same question and found against holding the social host liable in Campbell v. Bd. of Wabash College, 495 N.E.2d 227 (1986).

Statutes Affecting Social Hosts

Some states have statutorily moved to establish a position regarding the liability of social hosts. These statutes are not uniform, and arrive at liability by different means, or even are used to establish a position of no liability (based on the common law principle that consumption and not serving of alcoholic beverages is the proximate cause of injuries in alcohol-related incidents). The statutes of Colorado, New York, Illinois, and California are representative of these types of laws.

In New York, the statute provides that any person injured in person, property, means of support, or otherwise, by reason of the intoxication of a person under the age of 19, has a cause of action against any person unlawfully furnishing to or assisting in procuring alcoholic beverages with knowledge or reasonable cause to believe that such person was under 19 years old. This creates the same liability for social hosts that establishments governed by dram shop or alcoholic beverage acts have in regard to the furnishing of alcohol to minors.

The social host legislation of Illinois is only slightly less sweeping. This law provides that any person shall be guilty of a petty offense if (1) he or she knowingly permits a gathering at a residence which he or she occupies “as an owner or occupier” where any one or more persons is under 18 years of age and these persons possess or consume alcoholic beverages; and (2) the person occupying the residence knows that a person under 18 leaves the residence in an intoxicated condition. Since this statute creates a petty criminal offense for providing alcoholic beverages to a minor, but does not specifically create a civil cause of action, the civil liability of the social host is not clear. Future case law in this area will determine the situation.

California and Colorado have also statutorily addressed the liability of social hosts, and arrived at the opposite conclusion. As discussed earlier, these laws embodies the common law principle. The California statute states, “No person who sells, furnishes . . . any alcoholic beverage . . . shall be civilly liable to any person or the estate of such person for injuries inflicted on that person as a result of intoxication by the consumer of such alcoholic beverage.”

Colorado's law exempts social hosts from liability unless the social host knowingly and willfully serves liquor to a person under 21 or a visibly intoxicated person. The statute also caps damages at $150,000. In 1991, a plaintiff argued that Colorado's law was unconstitutional as unreasonably vague and violative of due process and the equal protection rights of the heirs of intoxicated persons. The court upheld the statute, stating it was reasonably related to the state's legitimate purpose of preventing negligence by consumers of alcohol (Sigman v. Seafood Partnership, 817 P.2d 527).

As mentioned by the Pennsylvania court in the previously discussed Klein case, Minnesota has also adopted this position.

Social Hosts and Minors

More often a civil cause of action has been found against social hosts who provide alcoholic beverages to minors. One of the leading cases is Linn v. Rand, 356 A.2d 15 (1976), in which a New Jersey appellate court held that a person who furnishes excessive amounts of liquor to a minor on a social occasion may be held liable when the intoxicated minor causes injury to an innocent third party. The injured person must prove that the driver was a minor; that the social host was aware of the driver's age; that the minor intended to drive but nevertheless was served alcohol, which resulted in the minor being unfit to drive; that an accident involving bodily injury was reasonably foreseeable; and that the host's negligence was the proximate cause of the accident or injuries.

In Longstreth v. Fitzgibbon, 335 N.W.2d 677 (1983), a Michigan appellate court held for a cause of action against the hosts of a wedding reception, differentiating between the liability involved in furnishing liquor to adults and minors. “Suit is not predicated upon the furnishing (of) alcoholic beverages to a strong and able-bodied man. Rather the cause of action stems from the furnishing (of) intoxicants to minors. Therefore, the principle which would have barred plaintiff's suit had the alcohol been furnished to strong and able-bodied men is not in point.”

Host Liquor Liability Insurance

As to liability insurance applying to damages in Linn, and other such social host cases, whether liability arises under statute or not there is no liquor liability exclusion in comprehensive personal liability coverage. However, insurers might successfully argue that the effect of the expected or intended injury exclusion contained in personal liability policies is to eliminate coverage for bodily injury or property damage that is reasonably foreseeable from the standpoint of the insured. A court could relieve an insurer of obligations to an insured through this channel; it may be a court would hold that damage or injury stemming from a host's serving liquor to a guest to the point of intoxication should be expected even if not intended. Host liquor liability insurance, available through specialty markets, might be considered for coverage at least of defense costs.

Similarly, businesses in no way connected to the alcoholic beverages industry, but who do on occasion provide liquor for clients or employee functions, may find themselves in the same gray area. All general liability policies contain the liquor liability exclusion. Again, there would appear to be coverage for damage or injury arising from the intoxication of guests or employees by virtue of the fact that such concerns are not engaged in the business of alcoholic beverages. However, the same provision related to “expected or intended” injury or damage may be held to apply, thereby negating the general liability insurance coverage. Host liquor liability insurance should be considered for commercial insureds with social entertaining activity.

Liquor Liability Insurance

Prior to the 1986 commercial general liability program, liquor liability insurance was a specialty coverage protecting against liability eliminated by the liquor liability exclusion. With the 1986 commercial general liability program ISO introduced a separate liquor liability coverage part. The ISO liquor liability form provides coverage for liquor liability imposed on an insured for incidents arising out of the sale, furnishing, or serving or liquor. It applies to insureds in the liquor business, and may be written on an occurrence or claims-made basis.

Of course, liquor liability insurance is not a substitute for other liability insurance. An insured in the liquor business also needs all the other liability coverages common to businesses generally, i.e, premises and operations liability coverage, products liability insurance, etc.

Underwriting Criteria

The careful underwriting of liquor liability insurance takes in a variety of factors. Of primary concern is whether the state in which the risk is located actively imposes liability on vendors and is the route by way of a dram shop act, alcohol beverage control act, or at common law? If the former, the underwriter also will want to determine whether the act imposes severe or moderate liability. ISO maintains a list of state liquor liability classifications, rating states A, B, or C depending upon the severity of the liquor liability exposure in that state.

Insurers that write liquor liability insurance will consider the moral caliber of the management and its financial condition for one thing. They also will require—if not already being practiced—liquor businesses continuously to exercise basic precautions to avoid selling liquor to minors or to those who are intoxicated. Insurers may require, or offer a premium credit, to alcoholic beverages providers whose staffs have attended a liquor safety program.

Businesses that sell food and alcoholic beverages, the latter on an incidental basis, i.e., food is the principal factor in drawing customers or family trade, are usually considered acceptable risks. First class hotels and motels are usually acceptable also, along with liquor stores, drug stores and other stores that sell by the bottle.

However, those businesses that primarily sell alcoholic beverages for consumption on the premises or cater to a more boisterous clientele, such as some neighborhood bars and night clubs, may find insurance difficult to purchase—even though many insurers may be willing to write all of the other insurance. Separate free-standing liquor liability insurance may be available for these risks in the specialty market.