When Insurance Is the Risk

The electrician was fixing a light on the side of a building. Simple. But he didn’t shut off the power before inserting a screwdriver into the light socket. An electrical shock knocked him off his ladder, and both of his legs were crippled in the fall.

No co-op or condo association would be at fault here, right? It was the electrician’s own carelessness. Yet the electrician successfully sued both the building and the management company, ultimately winning a $7 million award in appellate court.

A fluke? No. Such is New York State’s one-of-a-kind labor law, commonly known as the Scaffold Law, which states that building owners, including co-op and condo boards, bear absolute liability for workplace injuries, even if they’re not at fault. And since contractors’ insurance policies now carry more and more “exclusions” – things their insurance carrier will not cover – that means co-op and condo boards, their managing agents, attorneys and insurance brokers must be on high alert to review the fine print in the insurance policies of everyone who sets foot on the property. Failure to do so can cost $7 million – or more.

Paying More for Less
The proliferation of exclusions in insurance policies is just one by-product of what’s known as today’s “hard” insurance market. Driven by large losses – including seven-figure jury awards like the one that went to the electrician – insurance underwriters began tightening their policies about two years ago by raising premiums, reducing coverage limits and adding exclusions. Excess-liability policies, known as umbrella policies, have also seen rising premiums and declining coverage limits.

Exclusions come in many flavors, and most are poisonous. “One of the primary exclusions we run up against,” says Benjamin C. Kirschenbaum, a vice president and the general counsel of the management company FirstService Residential New York, “is the general-liability policy for the contractor saying, ‘We will not cover you, the contractor, for any claims by a third party (such as a co-op or condo association) that apply to your employees’ claims.’” So, for example, if a contractor’s employee falls off the roof and the contractor’s policy has this exclusion, the board is not covered.

Another common exclusion is known as the “designated-worker endorsement.” According to Jason Schiciano, a co-president of the insurance brokerage Levitt-Fuirst Associates, “the contractor’s policy might say, ‘This insurance applies to the following classifications: interior carpentry, interior painting, interior drywall,’ which means everything else is excluded. So if the contractor is doing work on the outside of a building, they don’t have coverage.” Similarly, if there’s a 10-story height exclusion, facade work on the 11th floor and up isn’t covered. “Other policies,” he adds, “might exclude roof work.”

Exclusions even get geographical. “It’s very common to exclude work inside the five boroughs of New York City,” Schiciano says, “because (the city) has its own worker-injury laws (in addition to the state’s), and jury awards inside the city can be even more substantial than outside the city.”

Protect Yourself
The most basic thing boards need to realize is that it’s important to review the insurance policy itself and not be satisfied with the certificate of insurance. This is a short form supplied by insurance brokers naming the carrier and stating the dates the policy covers and the limits on coverage – but, crucially, not detailing any exclusions that may exist. “The key message to a board,” Schiciano says, “is that you cannot rely on the certificate of insurance alone as evidence that you are protected by the contractor’s insurance policy.”

Boards do have some leverage. “The board is writing the check,” Schiciano says. “If the contractor wants to bid a job or have an opportunity to continue working in a building, then the contractor has to fork over not only his full general-liability policy but also his umbrella policy. If they don’t want to do that, that should be a red flag.”

There are other ways for boards to protect themselves. “We were interviewing contractors and found two good ones basically alike in price,” recalls Robert M. Sullivan, an attorney versed in labor law who is president of his 350-unit condominium in Peekskill. “One of them had an exclusion for injuries to his employees” – meaning any such injuries would be solely the responsibility of the condo association’s insurance.

The board asked the contractor to seek a waiver of that exclusion or upgrade his policy in order to remove it. “He says, ‘Ah, you don’t have to worry about that. We’re real safe.’ The conversation ended quickly,” Sullivan says. The board hired the other contractor after confirming his policy had no such exclusion.

Boards have traditionally protected themselves by having the contractor agree in writing to “indemnify and hold harmless” the co-op or condo association and its management, and to list them as an “additional insured.” “So if there’s proper insurance and proper indemnifications from the contractor to hold the (association and management) harmless,” Kirschenbaum says, “then the burden shifts to the contractor’s insurance.” Without those safeguards, the contractor’s insurance policy will defend the contractor but not the building owner.

Keeping Track
To ensure that their co-op and condo clients are not exposed to unnecessary risk, some property managers turn to a third-party compliance firm. Such specialists vet contractors and their insurance policies and provide an independent analysis so boards can make informed decisions.

“It’s a matter of efficiency,” says Joseph Bushey, the president of Vendor Information Verification Experts (VIVE). “In a lot of cases, we are not only looking at the underlying general-liability policy but also the overlying umbrella policy. They could be in excess of 300 pages each.”

VIVE’s services include conducting inquiries into insurance-policy exclusions, preparing RFPs, tracking documentation and rating vendors. “We’re here to help implement the risk-transfer process,” Bushey says. “There’s never a way to get out of risk, but we want to try and get competency up to a higher level.”

Keeping track of every policy for every contractor and subcontractor on a major capital project – including the critical detail of policies’ expiration dates – can be a major headache for property managers. To alleviate the pain, Schiciano’s brokerage has developed proprietary software called Risk Reduction Services. By keeping track and making sure that all policies are up to date, the system reduces the risk that boards will get blindsided.

When it comes to contractors’ insurance policies, size sometimes matters. “Most large contractors have become accustomed to providing their policies,” says Kirschenbaum of FirstService. Mom-and-pop contractors without a back office, on the other hand, can present problems. “Sometimes we end up having to go back to the contractor and say, ‘Y’know, we’re not getting the policy,’” Kirschenbaum says. “It becomes laborious – and it can take weeks of going back and forth.”

Sullivan, the attorney and condo board president, says there’s at least a partial solution for smaller contractors doing routine maintenance. In addition to getting the certificate of insurance, he advises, “you have a written blanket indemnity that says, ‘From time to time, Joe Smith is going to come on our property to do work. He agrees to defend and indemnify us, and we’re an additional insured.’ You do it for all the smaller jobs, the handyman jobs.” The form, he says, is “a template that’s been reviewed by our lawyer, and it’s filled out every year and attached to every job we have done on the property.”

Today’s hard insurance market has put an added burden on co-op and condo boards. In addition to parsing insurance policies – exclusions, expiration dates, coverage limits and so forth – they need to take proactive steps, such as being diligent about routine maintenance, that can keep insurance costs down. “More and more, the insurance carriers who (underwrite) our co-ops and condominiums have become unwilling to insure buildings’ habitational risks unless the buildings and their managing agents do a better job of what’s called risk management,” Kirschenbaum says. “There’s no perfect world, but the goal is to minimize the likelihood that the building’s insurance is going to have to respond to a claim.”