Liability Loophole

Where there’s work, there are accidents. And where there are accidents, there are lawsuits. In one case, the contractor had insurance to cover himself while working on buildings six stories and lower. The problem? The building he was working on was eight stories. In another situation, the contractor was doing façade work – a risky job that carries a high insurance premium – but told his insurer that he was a low-risk and low-premium paying carpenter. In yet another case, the contractor had insurance but the policy specifically excluded accidents that happened because of construction activity.

“It happens all over the place, all the time, and it’s only getting worse as contractors are clawing their way, trying to stay in business,” says James Samson, a partner at Samson, Fink & Dubow, who represents co-ops and condos in the five boroughs.

Insurance premiums for contractors are high, and Samson says contractors are trying to cut corners by lowering their costs. The problem is that the practice exposes condos and co-ops to liability if a worker or someone else is injured. “I’ve seen this at least five or six times this year,” Samson says.

Many boards simply ask their contractors, “Do you have insurance?” The contractor says, “Yes,” and board members think they’ve done their jobs. Samson, along with other attorneys and experts, says that’s not nearly enough.

“This is a huge problem and it comes up on a daily basis,” says Ed Mackoul, president of Mackoul & Associates, an insurance brokerage firm that provides insurance to co-ops and condos. “The main reason is that in New York labor laws are so strict.”

Reviews Required

The bottom line is that condos and co-ops should have their attorney and/or their insurance agent review the actual policy. Among the areas to consider:

Correct coverage. Samson says condos and co-ops should make sure that the insurance policy makes sense – is it the right coverage?

Subcontractor coverage. Check to see that all subcontractors either have their own policies or are covered under the main contractor’s policy.

Indemnification. The contractor should indemnify the condo or co-op and the managing agent. With façade work there should be a clause that specifically indemnifies them for Labor Law 240, a law that creates liability for building owners that vastly exceeds other potential defendants when workers are on elevated platforms. That means that any worker injured on the job or anyone else injured in the process of the job can make a claim against the building, the association, or the managing agent, but that contractor’s insurance will cover the defense and any possible judgment or settlement.

Sufficient insurance. Samson says many contractors don’t carry enough insurance. He says policies routinely offer
$1 million in liability coverage, an amount he called “absurdly low.” If the injured worker gets a judgment for $2 million, the worker will look to the building to make up the difference.

Additional insureds. The policy should also indicate that any subcontractors, managing agents, and co-op or condo associations used for the job are listed as “additional insureds,” says attorney Steven Sladkus, a partner at Wolf Haldenstein Adler Freeman & Herz.

Loopholes

But even these guidelines have loopholes. If a worker is injured while working on the building’s façade, he will probably sue his employer, the building he was on, and the managing agent. (With regards to any claim against the employer, the worker must first seek relief from workers’ compensation – and that award is eventually deducted from any other judgment.)

The problem is that if the contractor’s insurance policy is deficient in some way – he told his insurer that he is doing carpentry instead of façade work, for example – the insurer will deny the claim. That can leave the building open to liability, despite an indemnification clause.

The board president at a 79-unit Queens co-op learned these lessons the hard way. The directors had hired a company to do their Local Law 11 work, and the job had begun. A new property manager saw some problems with the work and started to look a little deeper into the contract and the insurance coverage.

It turned out that the company did not have a rigging license so it used another company to put up the rigging, even though it had indicated that it would not use subcontractors for general work.

“The problem is that they were not insured to have their own workers on someone else’s rigging,” says the board president, who asked to remain anonymous. “We’re not sure who it was on the rigging. If it was the subcontractor’s people, they were not supposed to be on it, and if it was their own people on the other guy’s rigging, the insurance would not have covered it if there was an accident.”

The president says the work was under way for a few weeks and, luckily, nothing happened. The building fired the contractor immediately, and it has taken several more months to get the job rolling again.

How did it happen? The president says it boiled down to a problem with the former managing agent. “Our property manager at the time told us that we didn’t have to have this reviewed by our attorney because he had done a similar contract and he knew what was going to go into it,” says the president. “He said we could save money and time because we were eager to get this project going. We trusted him, and that turned out to be a very bad decision.”

Board Agonies

One problem is that condo and co-op boards are sometimes strangely squeamish about making demands on their contractors. “Boards think that if we make it too complicated then the contractor won’t sign it,” the president says. “I think that boards have to get over that. If you have a company that is intimidated by a large contract, maybe that’s not the contractor you want to deal with.”

Boards are sometimes hesitant to bring in their attorney, too. “It’s expensive and they are afraid it will delay the project because the attorney will come up with a concern,” says the president. “But if the attorney finds something, that’s a good thing. The extra cost of a few thousand more in legal fees is nothing compared to what can happen if the job goes bad.”

“It’s absolutely worth it to have the attorney look it over and make sure everything looks good,” the president says. “The contract we just signed with our new contractor is huge, but we are completely covered in it – and they were still willing to sign it.”

HOMEOWNERS’ INSURANCE

Boards need to be concerned about contracting jobs that go on inside owners’ or shareholders’ units – not just those jobs that are building-wide. If an owner hires a contractor to paint his apartment and the worker hurts himself, can the condo or co-op association be liable? Often the answer is yes.

One way that unit-owners are protected is by having homeowners’ insurance, but not all residents carry that protection. Condo and co-op associations can’t order residents to have homeowners’ insurance through an alteration agreement, but they could do so under the bylaws or proprietary lease.

“It would be a good proactive step,” says C. Jaye Berger, a Manhattan lawyer who specializes in construction and real estate law. “The easiest solution is that people should have their own insurance.”

Beyond that, a good alteration agreement will require contractors to have adequate insurance and to name the building, the managing agent, and the shareholder or unit-owner as additional insureds, says Steven Sladkus, a partner at Wolf Haldenstein Adler Freeman & Herz.

Berger recalls a problem where a co-op shareholder hired a contractor to do work in an apartment but a subcontractor on the job was injured. The contractor’s insurance excluded coverage for subcontractors. The subcontractor sued the original contractor as well as the co-op association and – eventually – the co-op shareholder, who did not have homeowners’ coverage. As the case progressed, the co-op sued the resident as well. That case is still pending. – JH