Building a Better Backstop

Cheryl Fitzpatrick, the chief underwriting officer at the insurance brokerage Mackoul Risk Solutions, had spotted a red flag. Her client, a 13-unit, self-managed Manhattan co-op, was getting ready to do a major facade project, and Fitzpatrick was walking the co-op board through the brokerage’s rigorous four-step protocol that’s designed to make sure the client is not exposed to liability if a worker is injured on the job.

Unfortunately, the board did not follow protocol and never sent Fitzpatrick the contractor’s insurance policy for review. The board did obtain a certificate of insurance from the contractor, but that didn’t reveal what an actual review would have. The policy, as it turned out, had an exclusion for any work done in New York City. During the project, an employee of the scaffold company, sub-contracted by the contractor, was injured — and he sued the building. The contractor’s insurance company denied the claim because of the geographic exclusion in the policy. The co-op’s insurer was on the hook.

“They now have a Labor Law claim on their general liability policy with a very large reserve,” Fitzpatrick says. “The building’s liability and umbrella insurance carriers non-renewed the policies, and their premiums more than doubled. This Labor Law claim will be on their loss history for the next five to eight years.”

Such co-op boards are often relegated to shopping in what’s known as the Excess and Surplus market, where carriers charge exorbitant premiums to insure clients regarded as bad risks.

Fitzpatrick, despite her best efforts, has seen it all before. “We can give advice, but ultimately it’s the board’s decision,” she says philosophically. “Boards have to decide how much risk they’re willing to take.”

Welcome to the treacherous new world of liability insurance for co-ops and condos in New York State.

Boards Still Don’t Get It

The self-managed Manhattan co-op had run afoul of Sections 240 and 241 of New York State’s Labor Law, widely known as the Scaffold Law, the only law in the nation that holds a building owner liable if a worker is injured on the property, regardless of who is at fault. That broad liability has resulted in eye-popping jury awards to injured workers, and those awards, in turn, have led the insurance industry into today’s “hard” market, where underwriters are making up for recent losses by raising premiums, lowering coverage limits and adding sometimes outlandish exclusions that are often buried in the finest of the fine print.

Those trends have led underwriters, brokers and their co-op and condo clients to exercise heightened scrutiny, such as the four-step protocol developed by Mackoul Risk Solutions. In a new wrinkle, one underwriter is insisting on vetting a contractor’s insurance policy before it will write a liability policy for a co-op or condo board that wants to hire that contractor. In effect, the cart is now before the horse.

“With regards to the New York City Labor Law, the insurance market in New York City is pretty near unsustainable for all involved,” says Cathie Curry, the managing partner at CMJ Underwriters, which writes co-op and condo liability policies for the Fireman’s Fund Insurance Co. “It’s impossible to underwrite a risk you can’t control. There are two things that have to happen here. First, the contractor needs to have adequate insurance. And second, you have to have good, enforceable language in the contract between the board and the contractor.”

To this end, CMJ Underwriters has hired additional employees who do nothing but vet the policies and contracts of potential contractors. These trained eyes are looking for nuances that would be invisible to laymen — possibly even to experienced brokers. They’re especially diligent about looking for exclusions that can, for instance, deny coverage for temporary workers, for work performed above a certain height, for work on the building’s exterior, even for work performed in a specified geographic location, such as the five boroughs of New York City. The devil is in the details, and failing to catch such exclusions can be fatal.

“We review every word of the contractors’ policies,” Curry says, “and about 95% of those policies and contracts need to be corrected. We’ve developed a database of about 1,500 approved contractors. It’s impossible to sustain this business without doing what we’re doing,”

Edward J. Mackoul, the president of Mackoul Risk Solutions, believes that CMJ’s vetting process will soon catch on across the industry. “More and more underwriters will start following Fireman’s Fund,” he predicts. “It’s only a matter of time.”

One result of these pressures is rising insurance costs for contractors, which translate into higher costs for the co-op and condo boards that hire them. “It’s getting crazy,” Curry says. “I’m actually talking to the Manhattan district attorney because contractors are falsifying insurance documents because the pricing on insurance has gotten so insane. It’s not so bad for the big boys, but this is especially unfair to smaller contractors. This is so difficult because boards still don’t understand the Labor Law and the exposures they have because of it.”

A Higher Level of Competency

Insurance brokers and property managers have joined underwriters in the campaign to educate and protect boards. The protocol used by Mackoul Risk Solutions requires boards to produce four pieces of information: a full copy of the contractor’s policy; a copy of the contract between the board and the contractor; the certificate of insurance, a toothless document that merely affirms that the contractor has insurance; and a document called an Acord 855, which Mackoul describes as a “certificate of insurance on steroids” because it demands that the contractor’s broker answer 13 questions about exclusions, additional insureds and other information.

Despite these precautions, situations like the uninsured accident at the self-managed Manhattan co-op continue to happen. “As much as we preach, these claims keep coming,” Mackoul says. “We’re dealing with one every few weeks, and there are consequences. In this hard market, if there’s an open Labor Law claim on file, it’s virtually impossible for a board to get a favorable policy.”

The Solstice Residential Group, a property management company, has developed a 13-page Master Services Agreement that grew out of the risk-transfer procedures that many insurance carriers send to management companies. Those procedures are twofold: review the contractor’s policy and make sure there are no exclusions; and make sure the policy indemnifies and holds the co-op or condo board harmless.

“I took the one-page risk-transfer procedures that carriers sent us, and I thought, ‘Why not write something that covers everything under the sun?’” says Alex Kalajian, the chief operating officer at Solstice. “The Master Services Agreement addresses multiple issues, including a lot of small-print items in the board’s contract with the contractor. It’s a comprehensive agreement that modifies the terms and conditions that are unfavorable to our clients.”

The Master Services Agreement was drafted by Solstice’s counsel, then sent for review to three brokerages — Hub International, One Point and York International. Their suggested revisions were incorporated into the final draft.

“Now what remains is to distribute it to the contractors who qualify to work in our buildings,” Kalajian says. “Their policies have the coverages we desire, and under the agreement they can’t have any exclusions under the (Scaffold) Law.”

The brokerage Levitt-Fuirst Insurance has developed software called Risk Reduction Services that tracks every policy of every contractor and subcontractor who sets foot on the properties of its co-op and condo clients. Critically, the software keeps track of all policy expiration dates so that boards are not left unprotected when policies lapse. As a bonus, the software is a major reduction in the workload of property managers.

Some boards turn to third-party firms, such as Vendor Information Verification Experts (VIVE), which pore over liability policies looking for exclusions, examine umbrella policies, prepare Requests for Proposals for contractors and rate vendors. “There’s never a way to get out of risk,” says Joseph Bushey, the president of VIVE, “but we want to try and get competency up to a higher level.”

No Bar Is Too High

The fear of liability has reached such a pitch that some boards and management companies are scrutinizing the insurance of workers hired by shareholders and unit-owners to perform jobs ranging from major alterations to minor tasks, such as painting a bathroom. Liability is liability, the thinking goes, and given the possible consequences it should be avoided whenever possible. Mitchell Berg, the managing director at the management company Maxwell-Kates, says the company is having its brokers scrutinize all contractor insurance policies.

“I believe there are minimum (insurance) requirements that all buildings are going to require for alterations that might exclude certain contractors who have done work for certain residents for many years,” Berg says. “They have just the bare minimum insurance, which may no longer satisfy a building’s requirements. I anticipate there’s going to be some discord, because some people are going to say we’re making it too difficult. We’re not looking to make it more difficult. We’re just looking to protect the building. So we’re in the process of coming up with communications about this to our boards, just letting them know that somebody may be upset because they feel the bar has been set too high in terms of insurance. But protection of buildings is the priority.”

One thing is certain, according to Kalajian: “All of this is going to create more costs. Not every contractor will qualify to work in our buildings, and not every contractor will be able to afford to qualify. Premiums are going up, and in some cases — particularly umbrella policies and directors-and-officers policies — coverages are coming down. Carriers are leaving the market in New York City.”

No matter how high the bar is set or how costly insurance gets, it’s virtually certain that un- or under-insured workers will continue to enter co-op and condo properties, that they will continue to sustain injuries, and that underprotected co-op and condo boards will continue to get stung by claims. “I’m a realist,” says Curry, the underwriter. “No matter how hard we try, we’re not going to catch 100% of this.”