A landlord decides to lease a space in a retail strip center to a sports bar. The landlord’s commercial real estate representative sends the lease to the new prospective tenant to sign — it is a standard industry lease that has the typical insurance clauses like general liability, workers’ compensation, property, etc. — simple enough, right?
However, there is one important consideration for landlords leasing to restaurants or bars serving alcohol — liquor liability.
Chances are the tenant has liquor liability already even though it may not be required in the lease, and yes, the indemnification and hold harmless clause in the lease may be broad enough to encompass any liquor-related matters.
However, depending on the lease indemnification language and the structure of the tenant’s insurance policy, the tenant could be forced contractually to defend the landlord out of pocket or the landlord (and/or landlord’s insurer) would have to defend the landlord until the indemnification could be enforced against the tenant for both damages and legal expenses. You can see how this might create a sticky situation for a landlord-tenant relationship.
In some states, the landlord can be held liable for the actions of a tenant. While my understanding is that it typically applies to criminal actions, it is not unreasonable to believe a landlord’s vicarious liability could be applied to liquor liability claims depending on the state’s dram shop laws, especially if the landlord is grossly negligent (failing to vet/perform due diligence of tenant or turning a blind eye to the tenant serving alcohol to minors).
The first question a landlord might have is, “Will my tenant’s insurance cover me?”
It depends. Typically, liquor liability is added to the Commercial General Liability (CGL) policy using a separate coverage form (like a CG 00 33 04 13 Occurrence form) that has its own insuring agreement, distinct limits, and its own conditions. If that’s the case, any “blanket” additional insured endorsement language will not be automatically extended to the liquor liability coverage part (unless the liquor liability coverage part is specifically listed as being modified by the endorsement).
Also, there is no contractual liability coverage provided in the liquor liability coverage part, so the lease indemnification will not trigger the tenant’s insurer to provide defense for the landlord. There may be cases where the tenant’s liquor liability coverage is provided by endorsement that modifies the general liability coverage part, like in a Business Owners Policy (BOP). In that case, the “blanket” additional insured language should extend to the landlord for liquor liability, as well (when required by written contract).
The second question a landlord might have is, “Am I protected under my general liability policy?”
Again, it depends. Some landlords of triple net (NNN) leases don’t even carry their own liability coverage — something we advise against — because they assume the tenant’s insurance policy will cover them, which isn’t always the case. It also depends if the landlord has standard general liability policy language or if there is any absolute liquor liability exclusion.
The unendorsed Insurance Service Office (ISO) CGL (form CG 00 01 04 13) excludes liquor liability “if you are in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.” If you don’t manufacture, distribute, sell, service, or furnish alcoholic beverages, any resulting liability would be covered. This is known as “Host Liquor” liability coverage.
That said, the landlord needs to evaluate their lease terms to see if they can be considered “in the business” of “selling” alcoholic beverages. For example, if the lease terms dictate that the landlord receives a percentage of the tenant’s gross sales, the landlord has a profit motive regarding alcohol sales. While the landlord is generally in the business of leasing space, this could be considered “in the business of selling alcoholic beverages” whether directly or indirectly.
Regardless, a good attorney could probably win both sides of this argument. As a precaution though, this landlord should endeavor to require the tenant to name the landlord as additional insured on the tenant’s liquor liability coverage part and/or look into purchasing their own liquor liability coverage.
If the landlord does not have an alcohol-related profit motive, then the landlord should look to the Host Liquor coverage provided in an unendorsed ISO CGL policy to at least trigger their insurer’s duty to defend for their vicarious liability.
The third question a landlord might ask is, “How can I protect myself?”
Here are some suggestions for landlords with bar/restaurant tenants:
• Require the tenant to carry liquor liability coverage with adequate limits.
• The liquor liability lease requirement should state there should be no exclusions for assault and battery or sexual abuse.
• Request or require by contract to be specifically named as a designated additional insured on tenant’s liquor liability policy using form CG 34 01 Additional Insured Owners, Managers or Lessors of Premises Liquor Liability. Please note that this ISO form was only introduced in 2019 so some carriers may not be using this form yet, depending on the state.
• If not allowed by the liquor liability carrier, consider contractual language regarding tenant’s duty to defend obligation to be immediately triggered for alcohol-related claims where landlord is named in the suit.
• Track and review tenant certificates of insurance with the applicable additional insured endorsements being requested by contract. Request and review the full policy to confirm no assault and battery exclusions and that landlord is named as additional insured for the liquor liability coverage part (not just general liability coverage part) where permissible.
• Track tenant’s liquor license renewal dates and ask them to provide renewed liquor licenses to you for confirmation. Most liquor liability policies exclude coverage for all insureds if the proper licensing is not in place.
• Maintain a landlord liability policy including host liquor liability with sufficient limits in the event the tenant’s insurance does not adequately protect the landlord for liquor related matters.
• Discuss these matters with a qualified legal professional to structure leases properly and transfer the risk to the party that actively manages and controls the liquor exposure and stands to profit from the activity. The laws in every state are different regarding dram shops and contractual indemnifications, so an experienced attorney in your jurisdiction will be invaluable.
There are several insurance and risk management implications and variables when considering leasing to restaurants and bars serving alcohol. It is important that the insurance broker and legal counsel be involved early, and often, to ensure adequate protection for a landlord.
WRITTEN BY Paul Broussard Broussard, CIC, MLIS, SBCS, PWCA, cyRM is a risk advisor at Cavignac Insurance Brokers in San Diego, California, and is experienced in hospitality risks, real estate risks, as well as professional trades such as architects and engineers.