Bartender pouring drink
Blog Post

Bottoms Up...Not Belly Up

3 minutes

In recent months, rising liquor liability insurance premiums have been forcing multiple bars and concert venues to close in the state of South Carolina.

Liquor liability insurance has been a compulsory coverage in the state of South Carolina since 2017, with a minimum coverage limit of $1 million per occurrence and $2 million in aggregate. Not specific to bars and concert venues, examples of other required commercial insurance products include auto insurance, workers’ compensation insurance and professional liability insurance.

While mandatory insurance requirements are not uncommon, they can vary by jurisdiction, as they are often established to address specific risks and promote public welfare. However, in certain situations, meeting the requirements of mandatory insurance becomes unaffordable, creating significant strains on profitability and potentially leading to a business’ inability to remain open.

In South Carolina, the requirement for liquor liability insurance has presented a significant affordability challenge. Claims payments have increased and, as a byproduct, so have premiums. In fact, many insurers have stopped offering liquor liability coverage altogether, reducing competition and further exacerbating the challenges of finding affordable coverage.

How can the insurance market fill this void?

Alternative insurance options, such as captive insurance companies, make a compelling case. Given the low-frequency and high-severity nature of liquor liability coverage, there is the potential to insure the risk through a single-parent captive as part of a broader set of captive insurance policies. The presence of additional coverages, specifically with higher frequency or lower severity, would help achieve risk distribution that likely would not be present if liquor liability was insured on a standalone basis. Other ways to improve risk distribution would be through a group captive or pooling arrangement. Aside from risk distribution, captives often foster a stronger focus on risk management, which can result in better risk control and loss prevention measures. This can lead to lower premium costs or other financial benefits as the parent company can retain underwriting profits and accumulate surplus.

However, establishing a captive requires a significant initial investment and capitalization. Consideration must also be given to risk concentration and lack of diversification, which could lead to volatility in its financial results. Beyond the captive realm, Excess & Surplus (E&S) carriers may prove viable in their willingness to write the risk if there is an availability shortfall in the traditional market. Insuring through E&S carriers typically involves lower initial costs compared to establishing a captive; however the E&S route may not solve the issue of premium affordability, given that their willingness to insure higher-risk exposures comes at a cost.

Utilization of captive insurance companies has significantly increased over the years. In fact, South Carolina has one of the largest captive insurance markets in the United States and could certainly leverage this challenge into an opportunity to maintain its thriving entertainment industry.

News & Insights