ISO Pull Up A Stool: Federal Appeals Court Offers A Different Way To, Er, Draft A Liquor Liability Exclusion

ISO Pull Up A Stool: Federal Appeals Court Offers A Different Way To, Er, Draft A Liquor Liability Exclusion

A couple of the amendments to the 2013 version of ISO’s workhorse commercial general liability policy (CG 00 01) involve the Liquor Liability exclusion. In general, it has been amended to state that it applies even if the claims against any insured allege negligence or other wrongdoing in the supervision, hiring, etc. of others and the failing to provide transportation of any person that may be under the influence of alcohol. The exclusion also has been amended to state that a BYOB is not considered selling, serving or furnishing alcoholic beverages.

The Sixth Circuit just offered one more thing that ISO may want to consider if its intent is to preclude coverage under a CGL policy for all-things-liquor and shift such exposures to a stand-alone Liquor Liability policy.

At issue in KSPED LLC v. Virginia Surety Company, No. 12-6618 (6th Cir. June 2, 2014), [enhanced version available to lexis.com subscribers], was coverage arising under the following circumstances. Cynthia Bivens, along with John Marsh, attended an event at the Kentucky Speedway race car track. Marsh was served alcohol by a food and beverage concessionaire employee. Later that day, Bivens, while riding in a vehicle driven by Marsh, sustained fatal injuries when Marsh lost control of the vehicle, causing it to overturn. The Estate of Cynthia Bivens commenced a wrongful death lawsuit against Kentucky Speedway, which owned the racetrack, and DJ’s Food Service Management Group, Inc., the concessionaire that employed the individual who served an allegedly intoxicated Marsh.

The litigation was settled. The liability insurers for OS Speedway (the concessionaire that subcontracted to DJ’s the right to sell food and beverages at the Speedway) and DJ’s paid the estate about $350,000. Kentucky Speedway settled its portion for $10,000 and incurred approximately $74,000 in defense fees. Kentucky Speedway brought an action against Virginia Surety Company alleging that it wrongfully refused to defend and indemnify it pursuant to a Commercial General Liability policy. The district court concluded that Virginia Surety’s failure to defend and indemnify constituted a breach of contract.

The dispute centered around the applicability of the Liquor Liability exclusion. The relevant language at issue was that which is contained in the pre-2013 edition of ISO’s CGL form – coverage excluded for liability arising out of the sale of alcoholic beverages if the insured is “in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages.”

The court devoted many pages to the question whether Kentucky Speedway was “in the business” of manufacturing, distributing, selling, serving or furnishing alcoholic beverages. In doing so it took a very close look at the concession agreement whereby Kentucky Speedway granted OS Speedway the sole and exclusive right to sell food and alcoholic and non-alcoholic beverages at all events held at the Speedway. Following this arduous review the court concluded that Kentucky Speedway was in the business of selling alcohol: “Speedway’s substantial control over the manner in which alcohol was sold, beyond simply for the purpose of maximizing profits, only confirms our judgment that, notwithstanding the fact that the persons serving alcoholic beverages were not Speedway employees and that Speedway did not have a liquor license, Speedway was in the business of selling alcohol. The fact that Speedway chose to engage in the business of selling alcohol by entering into an agreement with a concessionaire who possessed such a license does not relieve it of the consequences of the conduct in which it engaged. Speedway exercised substantial and meaningful control over the sale of alcohol.” The court noted that “Speedway did not simply rent space to a vendor and collect a flat fee for the right to use the space.”

The court was also persuaded that, beyond the legal relationship between Kentucky Speedway and the concessionaire, the Liquor Liability exclusion applied based on its purpose: “The CGL Policy, as its language suggests, provides coverage, without payment of additional premiums, where the sale or serving of alcohol occurs on an infrequent basis because of the significantly lower risk of such limited activity. The exclusion of liquor liability coverage reflects the commonsense consideration that the use of premises for an ongoing venture of selling alcoholic beverages significantly increases the risk to the insurer. Whether the insured directly furnishes alcohol to consumers and whether it is licensed to do so do not affect the increased risk of insuring a party engaged in the regular for-profit sale of alcohol that the liquor liability exclusion removes from coverage.”

While that could have been last call for the court it wasn’t. Before turning off the tap the court provided some advice to Virginia Surety about how to draft a Liquor Liability exclusion: “While we decide this case in favor of Virginia Surety, our decision should not be viewed as an endorsement of the manner in which it drafted its liquor liability exclusion. There are at least two reported cases that provide examples of liquor liability exclusion clauses that could have easily avoided the burden and expense of this litigation. First, in Cnty. of Schenectady v. Travelers Ins. Co. [N.Y. App. Div. 1975], [enhanced version available to lexis.com subscribers], the insurance policy provided that it did not apply to bodily injury or property damage for which any insured ‘may be held liable, as a person or organization engaged in the business of manufacturing, distributing, selling or serving alcoholic beverages or as an owner or lessor of premises used for such purposes, by reason of the selling, serving or giving of any alcoholic beverage.’ Similarly in McGrif v. United States Fire Ins. Co. [S.D. 1989], [enhanced version available to lexis.com subscribers], the liquor liability exclusion provided that the insurance policy did not cover the ‘an owner or lessor of premises used for’ the manufacturing, distributing, selling or serving alcoholic beverages.”

Perhaps ISO will consider this advice or perhaps it sees the circumstances at issue in Kentucky Speedway – insured subcontracts the sale of alcohol, on its premises, to another -- as too infrequent to warrant an across the board change. Either way, when a court provides such specific instructions on how to draft a policy provision, note must be taken of it.

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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