Unintended Consequences

It’s no surprise that the cost of building repairs is higher this year than last, and one of the factors playing a huge role in this is construction liability insurance. Costs have been rising precipitously. Some industry experts believe that in a few short years, such insurance — necessary for building renovations, boiler replacements, facade repointing and much more — may be priced out of reach for all but the richest co-ops and condos. And, they say, that will be if you can even find a carrier offering it at all.

The problem doesn’t just affect boards. “Within the next few years, contractors will be unable to buy the insurance they need,” says Cathie Curry, a managing partner at CMJ Underwriters, which writes co-op and condo liability policies for the Fireman’s Fund Insurance Co. “Buildings will be on the hook, financially exposed to this risk on their own without insurance protection. That is the future.”

It is also the past: Co-ops in the 1970s could not easily find or afford liability insurance. A solution at the time was a 1981 law that allowed the creation of risk purchasing groups, or RPGs. These allow a group of insureds — such as multiple co-ops under the same management company — to band together to buy liability insurance from an insurance company. The theory is that the group benefits from the scale, since not every insured will experience a loss at the same time.   

But that solution may soon be no more, says Michael Wolfe, an industry veteran and the former owner and president of Midboro Management: “There are very few RPGs left in New York state, and many of the ones still around exclude coverage for construction- and labor law-related claims in some form or fashion.”

The primary reason, according to real estate, insurance and construction professionals, is the Scaffold Law, which holds contractors or property owners responsible if an employee is injured in a gravity-related fall due to improper safety equipment. The law is increasingly leading to large payouts in workplace injury lawsuits — both legitimate and fraudulent — in cases that normally are covered by workers’ compensation. Such lawsuits appear to be a growing trend, notes Elizabeth Heck, the chairman, president and chief executive officer of Greater New York Insurance Companies. In recent years, she says, there has been “a large uptick both in the frequency and the severity of the lawsuits.”

While there are practical steps boards can take to transfer risk to contractors and others, in the long term this only exacerbates the pressure on contractors. A few years ago, a general contractor working on your building might have paid $80,000 annually for a $100 million liability policy to cover workplace accidents. Now, Curry says, insurers might charge more than $300,000 for just $10 million in coverage. These extra insurance costs get passed along, which increases expenses for all sorts of repairs and maintenance.

The Heart of the Matter

Workers unquestionably deserve safe work sites. The problem is that the Scaffold Law makes not just contractors and construction companies liable for workplace injuries; it makes building owners just as liable — even though they’re not the ones running the work site. In light of modern-day employee safety entities such as the Occupational Safety and Health Administration and programs such as workers’ compensation, the more than century-old law and its related sections, while “well intended,” are “archaic,” says Eric S. McPhee, an executive vice president and the director of risk management at Orsid Realty, echoing a much-voiced concern.

One unintended consequence of the Scaffold Law is what he calls “a cottage industry of fraud” — or what Sophie Bird, senior vice president of real estate practice at IMA Financial Group, cheekily terms the “Scaffold Law industrial complex.” Many point to overzealous personal injury attorneys who convince plaintiffs not to accept workers’ compensation and to gamble that a lawsuit settlement or jury award will result in a bigger payday. (Both the New York State Trial Lawyers Association and the Building and Construction Trades Council of Greater New York declined requests for comment.)

McPhee says that in his nearly two decades at Orsid, which services 24,000 co-op and condo units in 215 buildings, this year marks “the first time that insurance premiums made a material difference in the impact of the maintenance and the budgets.”

Steps to Take

In the face of these higher risks and costs, there are some options to consider. These involve indemnification, the transfer of risk and the establishment of procedures to review insurance policies.

When you’re entering into an agreement with a contractor, it’s important to review the contractor’s insurance policy. You’ll want to make sure your building is indemnified, which means the contractor agrees to make good any loss, damage or liability the building incurs. It holds the building harmless. “You transfer risk by having a good indemnity agreement that pushes the risk back to the contractor, which is really where it belongs because they’re the ones responsible for safety at the job site,” Heck says.

Additionally, says Stuart Saft, a partner at the law firm Holland & Knight, you should insist on a named insurance endorsement, which “names the co-op and condominium as an insured party. This means the contractor is insuring not just their own company but also your building, which is especially important if the contractor goes out of business. “If the co-op or condominium board is named in the insurance policy as an additional insured, then the fact that the contractor goes out of business does not affect the co-op’s ability to be reimbursed” by the insurance company in the event of an incident, Saft says. 

To add to the insurance mix, CMJ’s Curry advises that coverage must be on a primary noncontributory basis. “That means that the building has an insurance policy and the contractor has an insurance policy, and we’re not going to argue over whose policy goes first, and we’re not going to share the claim,” she explains. “The contractor is going to be primary, period.”

The Bane of Exclusions & Limitations

While you would think an insurance policy covers what needs to be insured, that isn’t always the case. A contractor’s insurance policy may exclude coverage for specific things, and some of them defy reason. “I’ve seen policies that have height exclusions,” Heck says. “So you might have a roofer that has a policy with an exclusion for height-related work.”

Bird gives one of the most notorious examples: “an exclusion for New York City when they’re working in New York.”

While routine maintenance is typically excluded from an exclusion, the definition isn’t clear-cut. “A worker changing a light bulb is routine,” Wolfe says. “But a court recently decided that replacing a socket is not.”

In addition to insurance exclusions, policies come with dollar limits for what the insurer will pay out on a claim. In a general liability policy, that sum is typically $1 million of coverage for one occurrence. If the claim exceeds $1 million, an umbrella policy kicks in. In the past, umbrella policies were relatively inexpensive. “You could very easily get a $100 million to $200 million limit for under $5,000,” Bird says. “Now you’re sometimes looking at $25,000 for a $5 million limit.” She typically recommends that contractors carry a minimum umbrella of $5 million if they’re doing interior renovations and $10 million for exterior work.

Reviewing these insurance policies is for the knowledgeable, not a board. Your building’s insurance professional or attorney, or someone from your management company familiar with insurance, can do the vetting. Some management companies are turning to outside vendors to take on this task. Regardless, it’s up to you to make sure that someone is going deeper than the standard document, called a certificate of insurance, which simply certifies that the contractor carries insurance. “It’s critically important not just to get a certificate of insurance but to actually get the policy,” Heck says.

Relief on the Horizon

Some look to legislation as the long-term solution to issues with the Scaffold Law. New York Rep. Brandon Williams introduced the Infrastructure Expansion Act of 2023, which would “preclude absolute liability in any action against a property owner or contractor” for projects receiving federal assistance.

“This bill would reform New York’s Scaffold Law, an outdated and abnormal liability regime that grossly inflates construction costs in our state,” a spokesperson for Williams says.

While the bill targets properties receiving federal assistance, “it does open the door,” Heck says, “because if it’s okay for federally funded projects, why isn’t it okay for the rest?”

Williams’ office hopes this bill acts as an impetus for the New York state legislature, which over the years has shown little willingness to change the Scaffold Law.

For now, boards do have some ammunition to transfer risk and avoid payouts that spike a building’s insurance premiums. But this is only a stopgap. Unless something changes, liability insurance could rise so high that only the richest co-ops and condos would be able to afford work on their buildings.

“Changing the law — you know how difficult that could be, if it’s at all possible?” Wolfe asks. “But what’s the fail-safe for a building board? To not allow work to go on in their building?”

[SIDEBARS]

The Scaffold Law

Enacted in 1921, based on an 1885 law designed to protect construction workers from unsafe conditions, New York State’s Labor Law §240, nicknamed the Scaffold Law, is the only one like it remaining in the country.

It requires “contractors and owners and their agents” doing “erection, demolition, repairing, altering, painting, cleaning or pointing” of any structure except one- or two-family houses to provide workers with scaffolding and other specific equipment for “proper protection.” The law gives minimum technical requirements for the scaffolding and other equipment.

But a series of court rulings established that all construction workplace injuries are completely the contractor’s and building owner’s fault, regardless of worker negligence.

That’s called “strict liability.” Despite those words never appearing in the statute, “this is the interpretation that the courts have given,” says the veteran New York real estate attorney Stuart Saft, a partner at the law firm Holland & Knight.

According to a report by the Construction Law Committee of the New York County Lawyers’ Association, strict liability “deviate[s] uniquely from New York State’s public policy and codified laws.” In personal injury cases, state law — which pointedly makes no exception for the Scaffold Law — requires a standard of “comparative negligence,” meaning an incautious worker may bear some of the blame for an injury. But courts have “incorrectly construed the Scaffold Law to attribute absolute liability … to an owner, construction manager, and general contractor without regard to the fault of a claimant,” the report says.

Remarkably, this remains true even “if someone’s drunk or high or doesn’t follow the right safety procedures,” says Sophie Bird, senior vice president of real estate practice at IMA Financial Group. “You can’t use that as a defense.”

Paradoxically, the law appears to actually contribute to injury. A 2015 statistical analysis by the nonpartisan Transportation Research Board of the National Academies of Sciences, Engineering and Medicine compared data from 2000 to 2010 across 42 states and found evidence that New York state’s Scaffold Law “increases the number of nonfatal injuries by about 1 per 100 full time workers annually, which is consistent with the hypothesis that … workers underinvest in safety” because of the law. With about 67,100 workers covered under it, “the additional number of nonfatal injuries per annum due to the law is 670.”

Fraud

Everyone agrees that workplace safety and the protection of workers are paramount. And the construction industry is historically dangerous, with the most workplace deaths of any American industry as of 2022. Workers are entitled to protection under the law.

Yet news reports have documented many cases of fake falls and other instances of fraud.

“There’s fraud going on where individuals are claiming to be hurt at job sites that they never stepped a foot on,” says Cathie Curry, a managing partner at CMJ Underwriters. “It’s getting really ugly.”

Even if a contractor or building owner has evidence of fraud, it’s often moot, since most construction liability suits don’t go to trial — even when fraud is suspected. Why? Because jury behavior is difficult to predict and the cost of a trial is high. Insurers find it less risky and more economical to close cases via confidential settlements — and then raise your rates. That, together with verdicts generally favoring the injured worker in legitimate cases, has helped contribute to the sharp increase in liability insurance rates.