Real Estate Weekly Article Published– Click here to see the published article
State Labor Laws Leading to Skyrocketing Insurance Premiums for Contractors
by Eugene B. Podokshik – Principal and CEO, First Fidelity Brokerage
Contractors doing business in New York should brace themselves as insurance premiums across the board are skyrocketing. Fewer insurance carriers are writing coverage in New York, and the coverages offered are more restrictive. It is not uncommon for contractors’ insurance costs to go up 200, 300, or even 400 percent at renewal.
At the heart of this issue are the antiquated New York State Labor Law Sections 240, 241 and 241A, and a lot of opportunistic plaintiff attorneys who are exploiting the system. The NYS Labor Law imposes liability on property owners and their contractors for injuries to employees resulting from falls and such incidents as a worker being struck by a falling object, or for the failure by responsible parties to control hazards. Normally, if employees are injured on the job, their sole remedy against their employer (with certain exceptions for gross/intentional negligence) is to file a claim for Workers Compensation benefits. Workers Compensation is a no-fault system that provides medical benefits as well as lost wages for injuries that occurred on the job without having to bring action against the employer. So when workers are injured on the job, they will collect Workers Compensation benefits from their employer’s insurer. However, injured workers involved in construction due the sited Labor Law may also seek to receive compensation from the property owner of the job site by claiming that the owner failed to provide a safe work environment.
Owners have become more educated and have attempted to contractually transfer the risk of suits from injured workers back the general contractors or subcontractors. This is done via carefully drafted hold harmless and indemnification language. The owner has the general contractor contractually agree to accept the exposure, and the contractor in turn requires the same of subcontractors. Thus, when a worker is injured and brings a claim against the property owner, the property owner tenders the claim to the general contractor and the subcontractors for defense and indemnity. In effect, the general contractor and subcontractors are forced to assume responsibility to defend the lawsuit and look to their own General Liability policy to provide defense and indemnity. This is not supposed to happen. The General Liability policy is intended to provide protection from allegations of negligence by third parties not the insured’s own employees.
The carriers who offer General Liability coverage to contractors now have to either accept that they are being brought into these types of claims and charge the appropriate premium they believe will cover the risk or attempt to exclude coverage for this scenario, or exit offering liability coverage in New York State. Currently, only a handful of quality carriers offer General Liability and Umbrella coverage without the injury to own employee exclusion and are accordingly pricing the premiums with substantial increases.
This limitation is severely affecting small and midsize contractors. For larger contractors– those that can accept $250,000 deductibles and can cover such losses — the insurance market is still vibrant and their rates are for the most part constant while the operating cost structure for the small and midsize contractors is increasing. This translates to higher bid prices for new projects making them less competitive. It’s now just a matter of time before the larger contractors start winning most of the jobs and squeezing out the small and midsize contractors.
As a specialist broker in the construction industry, First Fidelity Brokerage has had to adapt to the changing insurance environment. To help mitigate the increases, we are also taking a more hands-on approach to marketing the insurance programs, often getting carriers to pre-inspect the accounts and having underwriters meet the contractors for face to face discussions. This particular important to one of our direct construction markets, The Travelers, who still remains committed to the NY marketplace. We also created several guides for our contractor clients to help with their daily risk management. In addition, we noticed that many attorneys drafting construction contracts had issues with the insurance and the indemnification language and that the construction agreements often did not line up with the insurance policies purchased leaving contractors exposed to significant losses. To address this we created a new position of Lead Counsel of Quality Assurance and brought on board a high-ranking construction attorney.
Yet, many challenges remain and premiums will increase. While the idea behind the Labor Laws was good, it is significantly hindering small to midsize contractors. If we want the small and midsize contractors to survive in New York, the only feasible long term solution is to have legislative reform.