New York Contractors Reeling From Huge Insurance Hikes

A huge upward spike in the cost of insuring construction projects against claims by injured workers is pushing up the cost of development, and at the same time eating into profits for an industry still struggling to bounce back from the recession. Construction companies and their subcontractors, which work under state labor law that puts absolute liability on the employer for injuries sustained on high-rise projects, say that their premiums have as much as tripled in the past year. 

Insurance companies, squeezed by low asset yields on one side, and big payouts for catastrophic events and soaring medical costs on the other, were hiking premiums even before Superstorm Sandy blew into the area.

Premium hikes are also being driven by a growing number of multimillion-dollar settlements for crane accidents and other lawsuits.

"In our New York City, the average claim involving New York Labor Law is approaching $4 million per lawsuit,” said Tom Grandmaison, executive vice president at AIG Property Casualty.

Traditionally, the cost of insuring a New York project for workers' compensation, general liability and excess liability is "3% to 4% of the value of the construction," he said. "Today, that number is 8%-plus."

Much of the increase is in the ballooning cost of reinsurance, or secondary layers of coverage. Typically, a re-insurer has to pay only after the first $1 million of coverage is used up, but that level is being hit much more frequently these days. Because of the number and size of claims, now the secondary carriers are suffering huge losses.

As a result, most insurers are now requiring a "buffer policy" of up to $5 million -- at a cost of nearly 10 times the previous rate for that intermediate level of coverage.

Brooklyn-based Skyline Steel Corp. got the bad news last summer.

"We were required by our customers, who are some of the larger contractors, to increase liability coverage from $1 million to $2 million per occurrence," he said. Skyline is paying the equivalent of 11% of sales after adding the additional coverage, up from 3.7%.  Skyline's bill jumped despite an "above average" safety record.

The Law behind the Costs

New York State's so-called 'Scaffold Law' - which holds the subcontractor liable even when an injured employee failed to comply with the company's safety policies and training - is the main culprit for skyrocketing insurance costs, according to Lou Colletti, president of the Building Trades Employers' Association.

He said the higher cost resulting from the law—the only one of its kind in the nation—could put some smaller subcontractors out of business, and even prevent some contractors from moving ahead with projects.

Attempts to change the law - to hold an employee partly liable for injuries caused by his or her own malfeasance - have died in Albany amid lobbying by trial lawyers and unions, who argue against watering down worker protections.

Rochester Assemblyman, Joseph Morelle, is introducing a bill this year to reform of the Scaffold Law, and allow owners, contractors, subcontractors and insurers to cite an employee's negligence as a defense.

Posing additional uncertainty for insurers is something called the "horizontal exhaustion" issue. It stems from a 2008 New York appellate court ruling on liability for the death of a worker who fell down an elevator shaft during the construction of the Bronx Court House. In that case, the judge ruled that the excess coverage held by the worker's employer should not kick in until after the primary insurance policy held by the building owner and that of the construction manager, Bovis Lend Lease, had been exhausted.

Higher Premiums

Because of that ruling, some primary insurers say they have no choice but to raise premiums to reflect their increased risk from claims against other companies working on the same project as their own clients.

The bad news, however, is that in the wake of the estimated $60 billion in destruction caused by Superstorm Sandy in New York City, Nassau and Suffolk counties alone, any hope of insurers cutting rates for contractors is more remote than ever.

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