Liquor liability insurance can save your business millions of dollars

Daniel Workman

Speeding over cones and flares, a 20-year-old drunken driver struck and killed Hakim Farthing, a police officer working at the scene of a fatal crash on the Baltimore-Washington Parkway in 2002. Farthing's estate filed a $50 million lawsuit against the owners of Dream, a nightclub where the drunken driver had been earlier in the night. The club allegedly featured open bars where guests could drink freely without having to pay.

In 2004, the lawsuit was settled for $410,000. The nightclub's insurer covered the settlement costs.

Lawsuits demanding that business owners pay for the damage their customers inflict can cost thousands or millions of dollars for businesses that sell alcohol. State liquor liability statutes also called dram shop laws) can place responsibility for losses on restaurants, bars and other establishments that:

  • Serve alcohol to intoxicated persons or any minor.
  • Sell liquor without a license or after hours.

To defend against potentially disastrous liabilities, restaurant and bar owners must learn about applicable state laws, buy adequate insurance coverage and implement safe-drinking environments.

What does liquor liability insurance cover?

Liquor liability insurance can be a powerful financial tool for bars and restaurants. Coverage helps protect against expensive lawsuits for injury and property damage caused by intoxicated patrons to whom the policyholder served liquor.

Various policies for liquor liability coverage have different maximums, conditions, exclusions and limitations. This is why business owners often consult insurance professionals for advice before choosing an appropriate insurance plan.

Specialty insurers like United States Liability Insurance Group offer comprehensive liquor liability insurance to restaurants and bars. Typically, businesses enjoy preferred premium rates if alcohol receipts account for 25 percent or less of revenue. Additional credits may be granted to policyholders who use ID scanners to confirm the ages of potential drinkers.

Liquor liability laws vary by state

Some states impose maximums on the amounts victims can recover from drinking establishments for personal injuries and property damages that intoxicated customers cause. Connecticut limits financial recovery to $250,000 for all claims from a single accident, according to the Connecticut General Assembly website. Maine also has a maximum liability of $250,000 per accident, but exempts medical expenses from that cap. Other states award much higher settlements on a case-by-case basis.

The legal criteria for liquor liability differ by state:

  • Massachusetts makes it illegal to sell or deliver alcohol to any intoxicated person.
  • New Hampshire law specifies that business owners and employees can be held accountable if a waiter or bartender failed to recognize obvious signs that a customer was drunk or did not ask a minor for proof of age.
  • Rhode Island courts take into account whether an employee of a bar was encouraging excessive drinking so much that it could lead to alcohol poisoning.
  • In Vermont, restaurants and bars may be hit with punitive damages for reckless conduct like allowing a guest to become drunk after legal serving hours.
  • In general, a liquor establishment in Ohio cannot be sued if the injury or death did not take place on the property. However, if an employee served alcohol to a visibly intoxicated person whose drunkenness then directly caused the injury or death, the establishment can be sued -- no matter where the injury or death took place.
  • California does not hold bars liable in civil court, even if the person being served was visibly intoxicated. The only way a business can be held liable is if it serves a minor.
  • In Texas, a business can be held liable if it serves alcohol to a person who is intoxicated to the extent that he's a "clear danger to himself and others."

Other ways to lower alcohol-related risks

Fireman's Fund provides some tips for preventing third-party liquor liability claims. Success often depends on hiring responsible, experienced staffers who know how to properly deal with intoxicated customers and with minors.

Developing a standard set of procedures for the sale of alcoholic beverages is essential. Below is a sample checklist for moderating the amount of alcohol that customers drink:

  • Track the number and types of drinks each guest has had.
  • Limit the number of straight-alcohol shots.
  • Offer only refills after guests have finished drinks they already have.
  • Provide water to all guests.
  • Add extra ice to drinks to slow the rate of alcohol absorption.
  • Offer free food and non-alcoholic drinks when a guest shows signs of intoxication.

Formal training programs and management-enforced safety procedures can reduce the risk of being sued. With fewer claims, businesses that sell alcohol will be in a much better position to negotiate lower premium rates from their liquor liability insurance providers.

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