SC taxpayers asked to fund new liquor liability insurance program

Update 2/28/24: Following this report, which revealed that H.5066 would create a state-run liquor liability insurance program funded with taxpayers' money, the House Judiciary Committee voted to remove that section of the bill. The amended bill, advanced by the full committee Tuesday, would still reduce the $1 million liquor liability insurance policy requirement for businesses meeting certain conditions; however, these conditions have been adjusted and may differ from the summary below. The bill is now on the House floor. We will share more details as we review the changes.

A bill under consideration by House lawmakers would establish a public option for liquor liability insurance, backed by South Carolina taxpayers. It would also offer special reductions to the current $1 million policy requirement – but only for businesses that agree to close early, limit drink specials, or meet other requirements.

The bill follows a surge of pleas from business owners to address the state’s insurance crisis, characterized by skyrocketing premiums and shrinking carrier options. However, there are better options available to resolve this issue, and we would discourage South Carolina from inserting itself into the insurance market.

SUMMARY

The bill (H.5066) would primarily do three things:

Establish a new program under the S.C. Department of Insurance (DOI) that encourages businesses to purchase a government-offered liquor liability insurance policy
Create a new state fund (henceforth called the “Liability Fund”) to support the program, funded primarily by the alcohol excise tax
Offer to reduce the state’s $1 million liquor liability insurance coverage rule for businesses that meet certain requirements; it also changes the $1 million policy to mean an annual aggregate limit rather than total coverage (applies generally, without conditions)

To govern this new insurance program, the bill proposes a nine-person board of directors comprised of appointees of the governor, legislative leaders, the DOI director, and the chief of the State Law Enforcement Division (SLED). If desired, DOI could hire a private insurance company to serve as the program administrator.

The board would have significant power. In addition to writing the “plan of operations” – which includes setting coverage limits based on volume of liquor sales, type of license, and participation in alcohol training programs – the board would be responsible for approving all rates, rating plans or rules involving its insurance products.

How would the program get its funding? It’s complicated, but the bottom line is: taxpayers. Initial funding would likely come from a one-time loan (amount not specified) provided by the Insurance Reserve Fund. That money could be used for general program expenses, and, more significantly, for paying the insurance claims of participating businesses.

If, for any reason, the Liability Fund cannot repay this loan within the prescribed timeframe (not yet specified), then money would be withdrawn from the state general fund – which all S.C. taxpayers pay into.

Subsequent funding would come from alcohol excise tax revenue. Known as the “liquor by the drink tax,” this is a 5% sales tax added to liquor drinks served to customers at bars and restaurants. Specifically, if the Liability Fund balance gets too low at any point, then all excise tax revenue in the following month must be credited to the fund (a process that repeats monthly until the balance is replenished).

Finally, the bill makes changes to South Carolina’s $1 million liquor liability insurance policy rule, which is required for businesses serving alcohol past 5pm. In addition to going from total coverage to an annual aggregate limit with regards to the policy, H.5066 would partially reduce the $1 million coverage requirement for businesses that meet certain conditions. These include closing earlier, keeping alcohol sales under a certain threshold, and limiting drink specials, among other things.

The opposite of free market

Under the bill, South Carolina would assume the role of an insurance provider. It would compete against private carriers and “aid” businesses in joining the new public option. How is this possibly justified? According to the text, “private insurers are increasingly unwilling or unable to provide affordable liquor liability insurance coverage in this state.”

Setting aside the obvious question – why can’t they offer affordable coverage? (Hint: it has to do with our punitive liability system) – let’s imagine for a moment what this would look like.

Consider the bill’s stated purpose: to help businesses acquire “affordable liquor liability insurance.” What this really means, of course, is to offer insurance that is cheaper than what the market can currently provide. And in practice, that equals lower premiums than those of private carriers.

Of course, this would be very appealing to businesses. Many owners are now paying double, if not triple, in insurance premiums compared to just a few years ago. Such rising costs are making it difficult to operate in South Carolina, and many are desperately looking for relief.

Backed by the power of government and taxpayers’ money, the new public option would have a clear advantage under the circumstances, potentially cornering the insurance market. Depending on how big the program is, and how many businesses it might absorb, more private carriers could decide to leave the state, as many have already done.

Meanwhile, businesses would face pressure to abide by whatever policies or criteria the state imposes to obtain this cheaper insurance. As mentioned in the summary, the program board is directed to set “limits of coverage” based on how much alcohol a business serves, whether its employees undergo training, its type of license, and other criteria deemed necessary.

Rules for reduced coverage

The bill would partially reduce South Carolina's $1 million liquor liability insurance requirement for businesses that satisfy one of the following conditions:

Closes by 10pm. Doing this would reduce a business's annual aggregate limit by $100,000 (and an additional $100,000 for each hour earlier until 6pm).
Completes an alcohol training course approved by the Department of Insurance; meets requirements set by the department (which may include using ID scanners, cameras and limiting drink specials); closes by 10pm; and has less than 30% of total sales come from alcohol. These allow for a $500,000 reduction.
The entity needing a license is a nonprofit, or it is hosting a single event for which a special event alcohol permit is obtained. These allow for a $500,000 reduction.

It's hard not to view some of these as a roundabout effort to impose new mandates on South Carolina bars and restaurants. While technically optional, everyone is fully aware that rising premiums are crushing local businesses, and that many are seeking relief. Owners might feel they have no choice but to close early or reduce alcohol sales to qualify for this reduced coverage.

Good intentions, wrong approach

While there are good intentions behind this proposal, a taxpayer-backed public option is not the solution to our insurance crisis. This would undercut the already shrinking private market for liquor liability insurance, causing businesses to rely on an unknown government program. Moreover, it represents an irresponsible use of taxpayer dollars, which should not be used to back a policy or pay claims.

Instead, legislators should address the root of the problem: the state’s punitive liability law. In South Carolina, a business serving alcohol can be held fully liable for a legal verdict, even if they are just 1% at fault for an injury. This results in excessive litigation, hefty insurance payouts, and consequently, sky-high premiums.

In a research report last year, we highlighted how one South Carolina restaurant was held liable for serving a single beer to a customer. After leaving the business, the customer visited multiple other bars or restaurants, becoming involved in a car accident more than 12 hours later. Despite these factors, the business had to pay out $250,000 through its insurance provider.

Lawmakers should prioritize S.533 (or its House companion H.3933) in the current session. This proposal would enact changes that lead to fewer businesses being forced to pay excessive and disproportionate damage awards, while still protecting injured South Carolinians.