Serving Up Protection: Navigating Liquor Liability in the Restaurant Industry

Running a restaurant comes with a unique set of risks, especially when serving alcohol. While alcohol sales can significantly boost revenue, they also introduce considerable liabilities that vary widely by state. For example, if your establishment serves alcohol to an intoxicated patron who subsequently drives and causes an accident, your business could be held liable for any resulting property damage, personal injury, or even fatalities, depending on local laws.

Moreover, serving alcohol to minors, even inadvertently, can result in severe penalties, including hefty fines and the loss of your liquor license. This is where compulsory liquor liability insurance becomes critical, as it protects businesses that serve, sell, supply, or distribute alcohol. However, relying solely on liquor liability insurance may leave businesses exposed to costly risks.

The Challenges of Procuring Liquor Liability Insurance

The inherent risks associated with selling alcohol make obtaining the right insurance coverage both essential and expensive.

One significant challenge is that standard liquor liability insurance does not protect the intoxicated individual who causes harm. If a drunk driver injures someone, the victim can sue both the driver and your establishment. If your business is found liable, you could face lawsuits not only from the injured party but also from the intoxicated individual for overserving them. While your liquor liability insurance will cover your legal defense, it only does so up to the policy limits—potentially leaving nothing for settlement fees. 

As the liquor liability market continues to face substantial losses, many policyholders encounter significant coverage challenges. According to industry data from Swarts, Manning & Associates, most insureds have seen double-digit rate increases since 2021, with some carriers imposing minimum premiums between $25,000 and $50,000. Additionally, some carriers have reduced their capacity or exited the market in certain regions, leaving policyholders with limited options and insufficient coverage. In South Carolina, for instance, the requirement for liquor liability insurance with policy limits of at least $1 million has become increasingly difficult to meet, exacerbating affordability challenges.

A compelling example is Palmetto Brothers Dispensary in Laurens, South Carolina. The business announced on social media that it would close its doors on June 22, citing the dramatic increase in liquor liability insurance costs as a major factor, as reported by WYFF News 4. "Our rates have gone up 325 percent since we opened our doors three years ago," the post read. "We were holding out hope for a legislative fix this session, but that seems more and more unlikely by the day." This dispensary is just one of many businesses in the state grappling with soaring insurance costs and the requirement to maintain a $1 million liability policy.

Given these challenges with liquor liability insurance, it’s crucial for restaurant and bar owners to thoroughly understand and comply with applicable local and state laws, implement robust safety measures, and secure comprehensive liquor liability insurance.

Compliance with Evolving Legislation

Drunk-driving incidents represent one of the most significant liquor liability exposures for businesses. According to the National Highway Traffic Safety Administration, more than 13,000 people died in alcohol-impaired crashes in 2022, and drunk-driving deaths have increased 33 percent since 2019. This alarming trend has led to an increase in large-scale lawsuits and claims against businesses that served alcohol to the responsible drivers. These legal challenges are expected to continue affecting the market in the coming years.

Many states have dram shop laws that hold businesses accountable for serving alcohol to minors or intoxicated patrons who cause harm. However, some states are revising these laws to limit business liability and make it more challenging for plaintiffs to prove negligence. For instance, new legislation may require proof that employees knowingly served alcohol to visibly intoxicated customers and that this service was the proximate cause of harm. It is vital for businesses to stay informed about legislative changes and ensure compliance with relevant regulations.

Implementing Safety Measures

Implementing effective safety measures is essential for minimizing risks associated with alcohol service. By developing comprehensive training programs and policies, restaurants can reduce the likelihood of incidents and ensure compliance with state laws. Consider incorporating the following practices into your operations:

• Alcohol Server Training: Provide regular training for staff on responsible alcohol service and recognition of intoxication signs to ensure compliance with state regulations and best practices.
• Monitoring Systems: Utilize video surveillance to monitor patron behavior and document any incidents, which can be valuable in defending against liability claims.
• Transportation Options: Partner with taxi or rideshare services to offer complimentary rides for patrons, minimizing the risk of drunk driving incidents.
• ID Verification: Implement strict ID-checking procedures with advanced technology to prevent service to minors, reducing the risk of underage drinking.
• Record Keeping: Maintain detailed bar logs and records of all incidents and responses, demonstrating diligence and compliance in the event of a liability claim.

Alternative Insurance Solutions

Despite these challenges, there are viable solutions for restaurant owners such as alternative insurance. This refers to risk management strategies that deviate from traditional insurance models, offering customized solutions to businesses with unique or complex risk profiles. 

One prominent form of alternative insurance is a captive insurance company, which is a wholly-owned subsidiary created by a parent company to insure its own risks. Captives allow businesses to tailor coverage to their specific needs, retain underwriting profits, and potentially reduce insurance costs by participating in the underwriting process. This approach provides greater control over risk management and can be particularly beneficial for industries with high-severity, low-frequency risks, such as liquor liability in the restaurant sector.

Captives not only provide a tailored approach to managing risks but also encourage a stronger focus on risk management, leading to better risk control and loss prevention measures. This proactive approach can result in lower premium costs and other financial benefits, as the parent company can retain underwriting profits and accumulate surplus.

The inclusion of additional coverages with higher frequency or lower severity helps achieve risk distribution that might not be possible if liquor liability were insured on a stand-alone basis. Other methods to improve risk distribution include group captives or pooling arrangements.

Understanding the unique risks faced by restaurants, particularly regarding liquor liability, is crucial for restaurant owners and operators. While the challenges of procuring and maintaining adequate liquor liability insurance are significant, exploring alternative solutions like captive insurance can offer a strategic advantage. By focusing on risk prevention and tailored coverage options, restaurants can better protect themselves and ensure their continued success in a challenging regulatory landscape.