GET IT IN WRITING

Rough Notes, Apr 2005 by Malecki, Donald S

Rejection of liquor liability coverage needs to be documented

In the last six months, two insurance agents are known to have been named as defendants in litigation over liquor-related motor vehicle accidents where the disputes were over the lack of proper coverage. How many other agents are confronted with a similar predicament is not known, but a fair guess is that there are many such actions today.

Let's face it. It is now a fact of insurance business life that whenever a consumer is confronted with the prospect of having to assume a large loss, instead of being able to transfer it to an insurer, the insurance agent will be brought into the matter.

Whatever the relationship may have been between purchasers of insurance and their agents, it usually sours whenever insureds learn they may have to pay claims out of their own pockets. Unfortunately, and in many cases, there is not much an insurance agent can do to avoid being named in a suit.

What certainly would knock the wind out of any such argument, however, is when an agent can produce proof that a consumer was given the opportunity to purchase certain coverage, but it was turned down. Realistically, this is not always possible in every instance, but it is always possible when writing enterprises engaged in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages, since it is such an obvious and natural exposure.

The common trap

It usually takes no great effort to identify whether or not some business owner or operator is in the liquor business. A visit to the location, the description of the business activity on an application, or a telephone call broaching the question is all that is necessary.

Having identified that the business involves a liquor exposure, the next step is to suggest that coverage for this exposure be purchased, since it is commonly excluded by commercial general liability policies. This may take a little more effort on the agent's part. The offer needs to be in writing because many prospects, will probably reject it when they learn what liquor liability insurance costs. Unfortunately, the next time the subject may be raised is when the business owner or operator is confronted with a liquor-related incident. It is not unheard of, at this stage, for those confronted with litigation to accuse their agents of not having pointed out the need for liquor liability coverage.

A common trap occurs when a new insurance agent takes over an account and a liquor exposure is not revisited. The existing commercial general liability policy excluding the liquor exclusion is simply rewritten with another insurer and the liquor exposure either is overlooked or assumed to have been addressed by the former agent. When this happens, and if litigation were to follow, it can be expected that the insurance agent not only will be named as a defendant, but also will have to spend a considerable amount of nonproductive time proving his or her innocence.

A case in point

This undoubtedly is what confronted the agent in the recent case ofSaylab υ. Don Juan Restaurant, Inc., et al., 332 F.Supp.2d 134 (U.S. Dist. Ct. Dist. Of Columbia 2004), where the consumption of liquor preceded an auto accident involving two deaths.

Although this case was somewhat long and complicated, it does contain some points that are common to these types of actions. There is nothing better than learning from someone else's mistakes rather than making your own.

The restaurant in question was acquired in 1994 following the death of its owner. The new owners had no experience in operating a restaurant and purportedly had little ability to read or write English. What these new owners did was to merely continue the existing commercial general liability policy that was in place.

The restaurant owners testified that they did not have any discussions with their broker about insurance coverage or the lack of such coverage until after this lawsuit had occurred.

What brought about this litigation four years after this business was purchased by its current owners is that, after having been served alcoholic beverage at the restaurant, the customer drove his car on the wrong side of a highway and collided head-on with a vehicle carrying four occupants, killing two.

The suit not only named the restaurant owners but also their insurance broker for not apprising them of the availability of liquor liability coverage.

Referred to by the court in this case as a "somewhat murkier issue" was whether the broker owed the insured a specific contract or tort duty to inform the restaurant about the existence of liquor liability coverage. It was conceded here that the broker was under no express contractual obligation to notify the restaurant owner about liquor liability insurance.

Nonetheless, it could not be resolved for purposes of this summary judgment whether the broker was entirely blameless. According to the court, a genuine issue of material fact existed as to whether a prudent insurance agent or broker would have informed the owner about the availability of liquor liability coverage. The issues dealing with the broker were remanded.