A December 16, 2013 federal appeals court decision on alcohol liability coverage provides an important reminder to industry members to carefully review the terms of their insurance policies.

In 2011, a group of insurance companies filed suit against Phusion Products (Phusion), the manufacturer of Four Loko, a popular flavored malt beverage that contained caffeine and other stimulants.  (Four Loko has since been reformulated without stimulants.)  The insurance companies asked an Illinois federal district court to issue a declaratory judgment that the insurers did not have a duty to defend Phusion in a series of lawsuits involving consumers of Four Loko.  The lawsuits involved persons injured or killed after consuming Four Loko or third parties who were injured or killed in accidents involving persons who had consumed Four Loko.

While many legal issues were raised in the litigation, the U.S. District Court and the 7th Circuit Court of Appeals focused on the language of Phusion’s insurance policy, which included a broad “liquor liability exclusion” that denied coverage for bodily injury or property damage for which Phusion could be liable “by reason of:  Causing or contributing to the intoxication of any person.”

The District Court and the Court of Appeals decided that Phusion’s insurance policy does not cover claims that Phusion’s actions caused or contributed to the injuries of consumers or third parties harmed by intoxication after drinking Four Loko.  The 7th Circuit opinion held that “the supply of alcohol, regardless of what it is mixed with, is the relevant factor to determine whether an insured caused or contributed to the intoxication of any person.”

Both courts reviewed the factual allegations in five lawsuits filed against Phusion.  In four instances, the courts found that the death and injuries resulted from intoxication of an individual who allegedly consumed Four Loko.  The fifth case involved allegations of heart damage from consumption of Four Loko and the district court found that the insurance companies did have a duty to defend Phusion.

The underlying lawsuits against Phusion involve complex claims of negligence, failure to warn, and violations of state consumer protection laws.  The status of those lawsuits is unclear at this point in time, but legal fees and any resulting settlement costs or damages are certain to be costly.  The liquor liability exclusion in Phusion’s insurance policy is common in many commercial insurance policies.  Liquor liability exclusions are common in many commercial insurance policies.  Industry members in all tiers should seek additional coverage beyond standard terms of insurance policies to protect against injuries and lawsuits involving the safety of the alcohol beverages they produce or sell.   Coverage should also be obtained for sales and promotional activities.  Even if an industry member is ultimately absolved of liability, the costs of defending a lawsuit are usually significant.

Decisions:

Netherlands Insurance Company v. Phusion Products, Incorporated, Case No. 12-1355, (7th Cir., decided December 16, 2013).

Netherlands Insurance Co. and Indiana Insurance Company v. Phusion Products, Inc. and Phusion Project, LLC, Case No. 11 C 1253, (U.S. Dist. Ct. N.D. Ill. E. Div., decided January 17, 2012 ).