September 15, 2017

Most business owners are at least passingly familiar with the concept of an insurance audit.  Many insurance policies are priced based on some factor that cannot be determined with certainty until after the policy term has expired.  Workers compensation insurance is based on payroll, many general liability policies are based on either payroll or gross sales.  For this reason, in order to determine a price for these kinds of policies, the insurance buyer must make an estimate for that unknown amount of sales or payroll.  The rating basis, either payroll or sales, is then audited at the end of the policy term and if the estimated payroll was higher than the actual payroll, the business owner will be due a refund, if the estimated amount was too low, then the business owner will owe an additional amount to the insurance company.  This is all pretty straight forward and most experienced business people are familiar with this process.

Enter the one way audit. Depending on your perspective, this is either a way to protect the insurance companies from unpaid audits, or it is a nasty scheme to take advantage of business owners by using their familiarity with the audit process against them.  Maybe you will come down somewhere in between these extremes when you judge the one way audit technique; I for one think it is much the latter.

So what is this one way audit technique? Simply put, policies with one way audit features have special wording in them that states that if the audit results in an additional amount due to the insurance company, then the customer must pay this amount.  However, should the audit reveal that there is a refund due the business, then the estimated amount paid in advance will be deemed to be a minimum earned premium, thus no refund will be due to the insured.  What?  How is this a fair way to treat your clients?  Asking them to estimate their gross sales, then keeping the money if they over estimate and charging them for the shortage if they underestimate is one sided and disingenuous in my opinion.  But I can accept this procedure if it is spelled out in large, colorful print on the top page of the policy and perhaps attaching a brochure that explains how this is different from every other insurance audit that the client will have ever seen.

Liquor liability insurance policies are particularly vulnerable to the one way audit clause. Many of them sneak this wording into their policy and usually bury it deep in the policy language.  I have never seen a one way audit based policy that attempted to bring this nasty clause to the buyer’s attention on the front page of the policy.  With more states like South Carolina and Rhode Island now making the purchase of liquor liability insurance policies mandatory, more and more business owners will be trapped by this sneaky clause and will lose money that they expected to have refunded to them at the end of the policy term.

So how do you protect yourself from the one way audit? First of all, you must know how to recognize it when you have this clause in your policy.  Your insurance agent should be able to help you with that.  Secondly, when setting up a policy with a one way audit feature, you should under estimate the gross sales for the policy period.  I would advise using 75% or so of what you think your sales will be when you make your initial estimate to the insurance company.  Remember, any amount that you over estimate will not be returned to you at the end of the policy term.  Now this under estimate will now mean that you will probably face an additional premium due at the end of your policy term.  If this will create a cash flow problem for you then, then I suggest that you plan for that in advance and put that money in a safe place to pay the audit at the end of the policy term.

For help and advice with your liquor liability insurance needs, and with your other insurance policy needs, please feel free to call us, toll free, at 877-687-7557, or visit us on the web at www.clinardinsurance.com.  For more information about South Carolina liquor liability insurance, please visit us at www.SCLiquorInsurance.com.

August 31, 2017

Liquor liability insurance is an important but underutilized insurance protection that any establishment that sells alcoholic drinks for consumption on their premises should consider purchasing. Many bars and restaurants do not fully understand this insurance policy and as such go without this important protection.  Some don’t purchase liquor liability because of the cost of the coverage, others mistakenly believe that their general liability insurance provides this protection and still others are just unaware of this kind of insurance policy in the first place.  We are seeing a trend in states where several are now requiring proof of liquor liability insurance in order to renew your alcohol permit.  States where this is in force include Massachusetts, Rhode Island and South Carolina.

 

So what kind of loss does liquor liability protect for the bar or restaurant owner? Simply stated, if you serve alcohol to a patron who then goes out and causes property damage or bodily injury to a third party, and if you are held liable for these damages because you over- served this patron, then liquor liability insurance is the insurance coverage that you need in place to protect you from this third party liability.

 

Many bar owners might say that they are very careful and do not over serve their customers and therefore they don’t need to purchase this kind of insurance policy. Sadly though, that is not the only determining factor in who might face lability and lawsuits.  I have seen several different cases where a patron leaves one bar, relatively sober, and then visits two other bars as the evening goes on, leaving each one progressively more intoxicated than the last.  The drunken patron later causes an automobile accident and kills a young driver and all three bars that served the drunken patron over the past 8 hours are sued.  Often they all end up having legal bills and a liability judgement against them.  So this exposure is not just one that you can control with your internal procedures.  When a loss exposure is this far out of your control, insurance is the best way to protect your business and personal assets.

 

Once you have determined that liquor liability insurance is needed, how do you decide what limit of coverage to purchase? Generally I would advise that you purchase as much as you can afford.  The problem here is that your exposure to loss is essentially unknown and unlimited.  There is no way to predict the extent of your liability to an unknown third party before an accident happens.  Given that, buying more than you need would certainly be safer than buying less.

 

Your liquor liability insurance policy will be rated based on your gross sales for alcohol. You will need to make an estimate of those sales for the 12 month period of time that the policy will be in force.  At the end of the policy term, the insurance company will ask for your actual alcohol sales during that time period.  If you had underestimated this sales number, then you will owe the insurance company an additional premium.  If you had overestimated your sales, then you will be due a refund.

 

If you want more information, or if you need help setting up a liquor liability insurance policy for your restaurant or bar, please feel free to call us, toll free, at 877-687-7557 or visit our website at www.clinardinsurance.com or www.SCLiquorInsurance.com.