Volume 10 • Issue 32 • Spring 2012

Letter from the Insurance Company Team INSIDE THIS EDITION:

The Many Forms of Liquor Liability and the Many Forms of Liquor Liability – Liquor Liability Coverage Issues Ringing in the New Year Historically, alcohol providers were not held liable for injuries to those served1 or third-parties injured by those served. Typically, liability to social hosts has been extended through four (4) paths: First, some states have extended their dram shop acts, which traditionally held commercial vendors of alcohol civilly liable under certain circumstances to include liability for social hosts. Second, some states have held alcohol providers, including social hosts, who violate a criminal beverage control statute civilly liable by finding that such a violation indicates that the alcohol provider was negligent or negligent per se. Third, some states have rejected the traditional common law immunity for alcohol providers and hold the alcohol provider liable based upon common law negligence principles. Finally, at least one state has enacted a statute which solely addresses social host liability.2 The “dram shop acts” referenced above “are the legislatively created remedies for injuries arising out of unlawful sales of intoxicating beverages by licensed retailers, and the cause of action is not based on negligence.”3 In the context of liability insurance, “[a] liability insurer’s duty to defend an insured on a claim arises when any part of the claim is arguably within the scope of the policy’s coverage, and an insurer that wishes to escape that duty has the burden of showing that all parts of the cause of action fall clearly outside the scope of coverage.”4 As commentators have noted, “the insurer’s first step in evaluating its obligation to its insured concerns the duty to defend. In many jurisdictions, a review of the complaint to determine whether, if proven, it might constitute a liability within the policy’s coverage is a sufficient factual basis on which the insurer can make its decision as to whether a defense is required.”5 Thus, “[a] comparison of the allegations of a complaint to policy coverage for purposes of determining defense obligations should focus on the key components of the coverage grant, the language of potentially applicable exclusions and other policy elements that affect the availability of coverage.”6 Consequently, just as there are a variety of ways to seek liquor-related liability, there are a variety of attendant coverage issues including insuring clause issues, potentially applicable exclusions, and other policy limitations. This issue will examine Liquor Liability and CGL Policies Page 2 those theories of liability and coverage issues individually, through homeowners’ policies, and commercially, through CGL Social Host Liability and Homeowners’ Policies Page 4 policies. If “Ringing in the New Year” has led to liquor-related claims under personal or commercial liability policies, the articles This newsletter is a periodic publication of Steptoe & Johnson PLLC’s Insurance will help identify any issues. Company Team and should not be construed as legal advice or legal opinion ______on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own lawyer 1 Daniel R. Conrad, “Intoxicating Liquors – Persons Liable: North Dakota Extends concerning your own situation and any specific legal questions you may have. For further information, please contact a member of the Insurance Company Team. Statutory Dram Shop Liability To Social Hosts,” 71 N.D. L. Rev. 743 (1995). This is an advertisement. 2 Id. (footnotes omitted). 3 2A American Law of Torts § 9:87 (footnote omitted). 4 44A Am.Jur.2d Insurance § 1964 (footnotes omitted). 5 1 Law and Prac. of Ins. Coverage Litig. § 6:4 (footnotes omitted). 6 Id.

Colorado, Kentucky, Ohio, Pennsylvania, Texas, and West Virginia www.steptoe-johnson.com Susan S. Brewer, CEO Page 2 • Winter 2017 RINGING IN THE NEW YEAR COMMERCIALLY Liquor Liability and CGL Policies By: Michelle E. Gaston and Mark Moses The National Conference of State Legislatures has indicated that the majority of states have “dram shop laws” which allow for licensed establishments that serve or sell alcohol to be found liable for injuries or death resulting from the intoxication of a patron.1 “‘Dram shops’ refers to establishments that serve alcohol by the dram, a unit of liquid measure used in the United States during the colonial period.”2 Some states that have enacted Dram Shop laws have limited liability for certain circumstances,3 while other states have no such limitations on liability.4 Notably, “[p]olicies of commercial general liability insurance typically exclude from coverage injuries arising out of the manufacture, distribution, and sale of alcoholic beverages.”5 However, as the Court noted in Kelly v. Painter, 202 W.Va. 344, 504 S.E.2d 171, 175 (1998 ), “[i]f Gatsby’s had desired an insurance policy that covered this type of liability [liquor], the bar could have obtained liquor liability insurance by paying the necessary additional premiums which are assessed as a percentage of the establishment’s total alcohol sales.” So the question is – what forms of liquor liability coverage are available?

FC&S6 advises that “[t]he liquor liability exposure is not meant to be insured under the standard general liability policy.”7 Thus, a common provision is the liquor liability exclusion. “Several versions of this exclusion are in current use. Besides the 1973 comprehensive general liability form that is still applicable in a diminishing volume of disputes, there are the two optional variations adopted in 1989.”8 “[C]laims based upon the insured’s violation of state alcoholic beverages law, negligence in failing to ascertain minor driver’s age, failure to warn a driver of his or her intoxication, and prevent that person from driving while intoxicated fall within the exclusion.”9 Although the subject of “misunderstandings, arguments and litigation”, liquor liability exclusions are generally upheld.10 Examples of judicial treatment can be seen in various West Virginia cases. Indeed, in Kelly, supra, at 347 the Supreme Court of Appeals of West Virginia stated that “[t]he insurance policy that is questioned here contains no ambiguity. We previously quoted the policy language which clearly states the insurance does not apply to bodily injury for which the insured may be liable if the insured caused or contributed to the intoxication of the person involved and the insured is in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages.”See also Berkhous v. Great American Assur. Co., 2013 WL 6152414 (W.Va. Nov. 22, 2013) (unpublished) (“The liquor liability exclusion expressly excludes coverage for lodges for ‘[a]ny liability of any ‘Insured’ by reason of: (1) causing or contributing to the intoxication of any person; or (2) the furnishing of alcoholic beverages to a person . . . under the influence of alcohol[.]’ We find nothing ambiguous in this language.”); Essex Ins. Co. v. Tri-Area Amusement Co., 2010 WL 148381 (N.D. W.Va. Jan. 12, 2010) (unpublished) (“The liquor liability exclusion language in the Essex policy is plain, simple, and easy to understand.”); Essex Ins. Co. v. Napples Bullpen, LLC, 33 F.Supp.3d 667, 674 (N.D. W.Va. 2014) (“The liquor liability exclusion is unambiguous . . . .”).

FC&S further instructs us that “[t]he exclusion in the CGL policy eliminates coverage for insureds that are ‘in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.”11 The 2013 ISO-CGL form clarified the exclusion “to preclude coverage even when claims allege the insured was negligent in hiring, supervising or training employees or that the insured provided or failed to provide transportation to inebriated persons.”12 In some instances, the CGL liquor liability exclusion generated a problem in “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.’”13 Thus, ISO generated two endorsements to the exclusion. Endorsement CG 21 50 was written “to clarify that one does not have to engage in a licensed activity or be operating with a profit motive to fall under the exclusion.”14 Endorsement 21 51 excepts scheduled activities from the exclusion.15

Thus, “[a]ny business16 that has a connection to the alcoholic beverages industry has a need for specialized coverage for liquor-related incidents.”17 Indeed, it was recently noted that “one in four liquor liability claims Swiss Re Corporate Solutions receives involve death claims.”18 ISO offers a liquor liability coverage form “that is a liability policy specifically developed for covering the liquor related exposures of insureds in the alcoholic beverages industry, or whose businesses involve the sale or service of alcoholic beverages.”19 The occurrence-based form is CG 00 33 04 13 and the claims-made form is CG 00 34 04 13.20

Businesses that occasionally provide liquor for client or employee functions are in a “gray area” because they are not “in the business,” but may have concerns regarding traditional exclusions such as ones for intentional acts.21 Consequently, commercial insureds engaged in those entertaining activities may consider “social host liquor liability insurance.”22 Notably, however, language of this form of coverage may also be restrictive. In Zurich Ins. Co. v. Uptowner Inns, Inc., 740 F.Supp. 404, 406 (S.D.W.Va. 1990), at issue was “Host Liquor Law Liability Coverage” which specified: PagePage 23 • Winter 20172013

Exclusion (h) does not apply with respect to liability of the insured or his indemnitee arising out of the giving or serving of alcoholic beverages at functions incidental to the named insured’s business, provided the named insured is not engaged in the business of manufacturing, distributing, selling or serving of alcoholic beverages.

[Emphasis in original]. The Court noted that “[t]he provision, in essence, provides coverage when Uptowner hosts Christmas parties for customers, social functions pursuant to solicitation of business for the hotel, and like functions. This is apparent from the language providing coverage when the insured is ‘giving or serving.’ However, the policy does not cover functions where Uptowner sells or serves alcoholic beverages for a profit.” Id. at 407.

Commentators have noted that “more than half the risks choose to operate without liquor liability insurance.”23 According to the commentary, “‘[m]ost think the premium is too expensive.’”24 The majority of the coverage that is written is in the form of “an endorsement under the insured’s general liability policy.”25 When examining a liquor liability matter, it is important to remember the various forms of exclusions, coverages and endorsements relevant to the issue. ______

1 Julie Carter, “How to Prevent Losses from Liquor Liability Coverage Errors,” IA Magazine (November 1, 2016). Delaware, Washington D.C., Hawaii, Kan- sas, Maryland, Massachusetts, Nebraska, Nevada, Oklahoma, South Carolina, South Dakota, and Virginia all do not have such provisions currently enacted. 2 Bill Roof, “Liquor Liability Insurance: More Than Half Still Do Without,” Insurance Journal (July 23, 2001). 3 Alaska, California, Florida, Georgia, Idaho, Louisiana, Michigan, Mississippi, Missouri, Montana, New Jersey, North Carolina, Pennsylvania, Tennessee, Texas, Utah, Washington, Wisconsin, and Wyoming all have such limited statutes in place. 4 http://www.madd.org/laws/law-overview/Dram_Shop_Overview.pdf; Alabama, Arizona, Arkansas, Colorado, Connecticut, Illinois, Indiana, Iowa, Kentucky, Maine, Minnesota, New Hampshire, New Mexico, New York, North Dakota, Ohio, Oregon, Rhode Island, Vermont, and West Virginia all have such provi- sions in place with no limitations. 5 9A Couch on Ins. §132:56 (footnote omitted). 6 FC&S (Fire, Casualty & Surety) bulletins are published by the National Underwriter Company which provides a number of products for the insurance and financial service industries. 7 “Liquor Liability: General Discussion of the Liquor Liability Exclusion and Related Issues,” http://www.nationalunderwriterpc.com/sites/fcsonline/commlin/ commgenlis/pro/liqulia/Pages/Liquor%20Liaiblity.aspx. 8 2 Casualty Insurance Claims §23:10 (4th ed.) (footnote omitted). 9 9A Couch on Ins. § 129:34 10 “Liquor Liability CGL Exclusion – Archived Article”, http://www.nationalunderwriterpc.com/sites/fcsonline/commlin/commgenlia/archart/Pages/ Liquor&20Liab%20CGL%20Exclusion%20Archive.aspx. Coverage for a bar owner may also be excluded if an incident involves allegations of assault and battery. For instance, in Great American E & S Ins. Co. v. John P. Cawley, Ltd., 866 F. Supp. 2d 437 (E.D. Pa. 2011), the court determined that the assault and battery exclusion and the liquor liability provision of the insured pub’s CGL policy applied to preclude coverage for injuries pub patrons allegedly sustained in a pub fight. There, the patrons’ claims arose out of the pub’s alleged service of alcohol to the assailants and the assailants’ alleged assault of the patrons. Id. 11 “Liquor Liability CGL Exclusion”, supra. Even entities that do not operate as a typical “bar” may fall into the liquor liability exclusion. See KSPED LLC v. Va. Sur. Co., Inc., 567 Fed. Appx. 377 (6th Cir. 2014) (stating that the insured racetrack owner was “in the business of” selling alcohol, within the meaning of a liquor liability exclusion in a CGL policy, even though the persons serving alcoholic beverages were not the owner’s employees and it did not have a liquor license); Nichols v. Westfield Ins. Co., 509 S.E.2d 149 (Ga. App. 1998) (holding that the business dram shop exclusion in a CGL policy, which stated that the insurer was not obligated to cover bodily injuries associated with the business of selling alcoholic beverages, was applicable to a nonprofit fraternal organization which derived income from selling alcohol on a regular basis). 12 “Comparison of the 2007 ISO-CGL Forms With The 2013 ISO-CGL Forms,” http://www.nationalunderwriterpc.com/sites/fcsonline/umbrilia/hist/Pages/ Comparison%20of%202007%ISO-CGL%20With%20the%202013. . . . 13 “Liquor Liability”, supra. 14 Id. 15 Id. 16 Notably, “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 reason- ably foreseeable from the standpoint of the insured.” “Liquor Liability: General Discussion of the Liquor Liability Exclusion and Related Issues,” http://www. nationalunderwriter/pc/fcsonline/commlin/commgenlia/ipro/liqulia/Pages/Liquor%20Liability.aspx. See, e.g., American Modern Home Ins. Co. v. Corra, 222 W.Va. 797, 671 S.E.2d 802 (2008) (analyzing a similar issue in terms of the definition of “occurrence”). However, ISO does offer a “Home Business Insurance Coverage” endorsement to a homeowners’ form for those operating a business in the home. See “ISO Home Business Insurance Coverage – Liability: Defini- tions and Liability Coverages,” http://www.nationalunderwriterpc.com/sites/fcsonline/perslin/homebus/Pages/ISO%20Home-Based%20Business%20Cvg%20 Liab.aspx. The home business endorsement, Form HO 07 01 05 11, can also include endorsement HO 07 54 10 00, which is a liquor liability exclusion with an exception for scheduled activities. Id. 17 “The Need For Liquor Liability Insurance: CGL Liquor Liability Exclusion Can Create Problems,” http://www.nationalunderwriterpc.com/sites/fcsonline/ commlin/commgenlia/miscdis/commergenliato/Pages/Need%20Liquor%20Liab%20ins.aspx. 18 Carter, supra. 19 “Liquor Liability Policy For Insureds in the Alcoholic Beverages Industry,” http://www.nationalunderwriterpc.com/sites/fcsonline/commlin/commgenlia/ iproliqulia/Pages/Liquor%20Liability%20Policy.aspx. 20 Id. 21 “Liquor Liability”, supra. 22 Id. 23 Roof, supra. 24 Id. 25 Id. Page 4 • Winter 2017

RINGING IN THE NEW YEAR AT HOME Social Host Liability and Homeowners’ Policies

By: Katrina N. Bowers and Katherine M. Mullins1

The winter months are filled with holiday parties and other social gatherings at home, many of which involve alcohol. What exposure does the host of the party have if someone sustains an alcohol-related injury during the party? What if a guest is injured while driving home intoxicated? Or, what if an intoxicated guest injures a third party who did not attend the event? If there is personal liability, does the host’s homeowners’ insurance policy provide coverage? In response to changing societal values and public policy, many state legislatures have enacted “civil damages acts” or “dram shop statutes” that provide a cause of action against the individual selling or furnishing alcoholic beverages.2 However, these laws generally do not apply to social hosts.3 In the absence of legislation imposing liability, injured third parties seek social host liability through other theories of liability. Under the common law, social hosts were not liable to guests or the general public for damages resulting from a guest’s intoxication.4 Many jurisdictions still adhere to the common law rule of non-liability of social hosts for injuries suffered by third parties as a result of the negligence of intoxicated adult guests.5 In contrast, other jurisdictions have recognized that persons injured because of the negligence of an intoxicated adult guest can recover in an action based on common law principles against the social host who served alcoholic beverages to that guest.6 Violation of a statute, such as providing alcohol to minors, may also give rise to a cause of action for negligence. Is there homeowners’ insurance coverage for this form of liability? The definitions in the policy may have a significant impact on whether coverage is available for a particular claim. For instance, in American Modern Home Ins. Co., v. Corra, the Supreme Court of Appeals of West Virginia determined that, absent policy language to the contrary, a homeowner’s insurance policy defining “occurrence” as “an accident” “does not provide coverage [under the ‘bodily injury liability’ portion of the policy] where the injury or damage is allegedly caused by the homeowner’s conduct in knowingly permitting an underage adult to consume alcoholic beverages on the homeowner’s property.”7 The court explained that “[t]o be an accident, both the means and the result must be unforeseen, involuntary, unexpected, and unusual.” “[C]onduct engaged in knowingly is not an ‘accident’ and thus not an ‘occurrence’ under [the subject] homeowner’s policy.” Also, in Allstate Ins. Co. v. J.J.M., the court held that injuries to a minor who was raped while at party in homeowner’s residence where alcohol was served did not constitute an “occurrence” as defined in the homeowners’ policy; therefore, the minor was not entitled to coverage under the homeowners’ policy.8 And, in Schinner v. Gundrum, 833 N.W.2d 685 (Wis. 2013), the court held that the insured’s actions in hosting a large underage drinking party and providing alcohol to a third party, who was known to become belligerent when intoxicated, were not accidental and thus were not an occurrence. Consequently, the relevant homeowners’ policy did not trigger liability coverage for a negligence claim arising from injuries sustained by a guest when he was attacked by the third party during the event.9 Additionally, while social host liquor liability is typically not specifically excluded under the personal liability portion of a homeowners’ insurance policy, other exclusions may be applicable. A violation of statute exclusion, which excludes damages resulting from an accident that occurred as a result of the insured’s violation of statutory law, may also come into play—for instance, if alcohol is provided to minors. In addition, the criminal acts exclusion may also be applicable. In Allstate Ins. Co. v. Blount, the court concluded that a wrongful death complaint alleging negligence on the part of an insured homeowner in failing to supervise and provide assistance to a minor visitor who died at her home after consuming alcohol and controlled substances qualified as an “occurrence” and was covered.10 However, the court ultimately held that coverage was precluded because the insured homeowner’s negligence was subject to the criminal acts exclusion of the insured homeowner’s liability insurance policy. In addition, if alcohol is sold, coverage may be excluded pursuant to the business pursuits exclusion, which excludes from coverage for bodily injury or property damage “arising out of business pursuits.”11 Moreover, in Illinois Farmers Ins. Co. v. Duffy, the court found that the motor vehicle exclusion, which precluded coverage for injuries arising out of the use of a motor vehicle, was applicable to a claim arising from injuries sustained in an automobile accident by teenagers who had previously consumed alcohol at a party at the insureds’ house.12 Page 5 • Winter 2017

In sum, under certain circumstances, social hosts can be held liable for providing alcohol to party guests who later injure themselves or a third party. Although there is not traditionally a liquor liability exclusion in homeowner policies, other coverage issues may exist through the definition of “occurrence” or various exclusionary provisions. ______

1Colton Parsons, a Summer Associate at Steptoe & Johnson PLLC and a law student at the West Virginia University College of Law, provided invaluable assistance in the research and writing of this article. 2 Diane S. Kane, Social Host’s Liability for Death or Injuries Incurred by Person to Whom Alcohol Was Served, 54 A.L.R.5th 313, (Originally published in 1977). 3 Id. 4 Peter A. Slepchuk, Social Host Liability and the Distribution of Alcohol and Narcotics: A Survey and Guide, 44 Suffolk U. L. Rev 933 (2011). 5 See e.g., Overbaugh v. McCutcheon, 183 W. Va. 386, 391, 396 S.E.2d 153, 158 (1990) (holding that “absent a basis in either common law principles of negligence or statutory enactment, there is generally no liability on the part of the social host who gratuitously furnishes alcohol to a guest when an injury to an innocent third party occurs as a result of the guest’s intoxication”); Beeson v. Scoles Cadillac Corp., 506 So.2d 999 (Ala. 1987); Kowal v. Hofher, 436 A.2d 1 (Conn. 1980); Klein v. Raysinger, 470 A.2d 507 (Pa. 1983). 6 See, e.g., McGuiggan v. New England Tel. & Tel. Co., 496 N.E.2d 141 (Mass. 1986) (recognizing liability for social hosts who distribute alcohol to visibly intoxicated persons); Kelly v. Gwinell, 476 A.2d 1219 (N.J. 1984). 7 American Modern Home Ins. Co., v. Corra, 671 S.E.2d 802 (W. Va. 2008). In the underlying claim, the homeowner was accused of a statutory violation. 8 “Occurrence” was defined as “an accident.”Allstate Ins. Co. v. J.J.M., 657 N.W.2d 181 (2002). 9 The guest alleged both negligence and a statutory violation against the homeowner. 10 Allstate Ins. Co. v. Blount, 491 F.3d 903 (8th Cir. 2007). 11 4 Law and Prac. of Ins. Coverage Litig. § 50:8. 12 Illinois Farmers Ins. Co. v. Duffy, 618 N.W.2d 613 (Minn. Ct. App. 2000). Page 6 • Winter 2017

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13 Offices in Colorado, Kentucky, Ohio, Pennsylvania, Texas, Team Leaders and West Virginia Laurie C. Barbe, Member Morgantown 304.598.8113 [email protected] More than 40 areas of practice Melanie Morgan Norris, Of Counsel Wheeling 304.231.0460 [email protected] Defense of first party cases including suits asserting “bad faith” Team Members and allegations of unfair settlement practices Michelle Lee Dougherty, Member Wheeling 304.231.0442 [email protected] Regulatory aspects of insurance, including consumer complaints Eric J. Hulett, Member Martinsburg 304.262.3519 [email protected] and other administrative matters involving the Insurance Commissioner Lucien G. Lewin, Member Martinsburg 304.262.3528 [email protected] 88 lawyers recognized in The Best Lawyers in America® Chelsea V. Prince, Member Morgantown 304.598.8174 [email protected] Top listed firm in West Virginia in multiple areas byThe Best Ancil G. Ramey, Member Huntington 304.526.8133 [email protected] Lawyers in America®, including Employment Law-Management, Labor Law-Management, and Litigation-Labor & Employment Richard M. Yurko, Jr., Member Bridgeport 304.933.8103 [email protected] Top listed in a number of litigation categories including, Michelle E. Gaston, Of Counsel Charleston 304.353.8130 [email protected] Litigation, Corporate/Commercial Law, Environmental, Labor and Employment, Mergers and Acquisitions, Personal Injury and Katherine MacCorkle Mullins, Of Counsel Charleston 304.353.8159 [email protected] Products Liability by the authors of The Best Lawyers in America® Hannah Curry Ramey, Of Counsel Huntington 304.526.8126 [email protected] Top listed firm in Ohio, Pennsylvania, and West Virginia in a combination of areas by The Best Lawyers in America® Katrina N. Bowers, Associate Charleston 304.353.8166 [email protected] Three Fellows of the American College of Trial Lawyers Mark A. Moses, Associate Morgantown 304.598.8162 [email protected] Three Fellows of the American College of Labor & Employment Andrew P. Smith, Associate Huntington 304.526.8084 [email protected] Lawyers Devon J. Stewart, Associate Charleston 304.353.8188 [email protected] AV peer-review rated by Martindale-Hubbell, the highest ranking given

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