Proper Insurance Coverage for Construction Crucial in Avoiding Costly Litigation

By | September 3, 2018

If residential property owners don’t confirm proper insurance coverage and carefully consider labor laws when hiring contractors, they could be in for some costly litigation, according to two speakers at a July roundtable held at Anderson Kill’s offices in New York City.

Allen R. Wolff, a shareholder at Anderson Kill, and Edward J. Mackoul, president of New York’s Mackoul Risk Solutions, spoke at the roundtable, offering tips to condo and co-op boards and members regarding how to carefully handle construction work.

“If, as the property owner, you do not make sure that you’ve crossed your T’s and dotted your I’s, these types of lawsuits can easily reach seven figures,” Mackoul said. “And I’ve seen a number of them.”

Wolff and Mackoul began the discussion with an overview of one of the nation’s toughest labor laws: New York State’s Scaffold Law. Labor Law section 240/241, commonly referred to the as the Scaffold Law, imposes liability upon contractors and property owners for all “gravity-related” injuries. While the Scaffold Law is unique to New York state, there are lessons to be learned for residential property owners, Wolff explained during the discussion.

“These laws have been on the books for a long, long time,” he said. “They predate OSHA (Occupational Safety and Health Administration) laws. They predate workers’ compensation laws.”

Wolff explained that there have been several calls for reform, stating that the Scaffold Law in New York was initially implemented at a time when an injured worker may not have had adequate recourse. He stated that since then, injured workers have workers’ compensation and certain OSHA protections available.

“Yet, New York still has these Labor Laws on the books,” he said. “…so you can see how out of time we are.”

Insurance industry trade groups have previously pushed back against the law, asking for a repeal and alleging it leads to higher insurance premiums. The Lawsuit Reform Alliance of New York (LRANY) has also scrutinized the law, stating it continues to drive up the cost of construction in the state.

“There are efforts every number of years to get these laws off the books, because they do add expense to everybody’s insurance in New York,” Wolff said. “They add expense to everybody’s contract prices in New York.”

The New York Committee for Occupational Safety & Health (NYCOSH), however, has objected to the criticism, stating that The Scaffold Safety Law requires construction sites to be built and maintained in a way that protects workers, and contractors and businesses are only liable when there’s an injury or fatality on the job if they put workers at risk of injury or death by violating critical health and safety regulations.

“Big business and insurance companies have attempted to lobby against the Scaffold Safety Law for years, arguing that the law leads to unfair insurance premiums,” it states on its website. “Instead of sacrificing worker safety by gutting the Scaffold Safety Law, we believe that insurance companies should open their books to the public. That way, the public can determine if the premiums being charged to contractors are justified.”

Requiring Written Contracts

That said, Wolff urged property owners that hire contractors for construction work to be careful in requiring written contracts that specify additional insured requirements, include a written defense indemnity and hold harmless provision and provide for New York labor law liabilities. He said this can ensure the right protections are in place and avoid responsibility for employee or contractor negligence falling on the property owner.

“You have to assess the risk, because if you don’t understand the risk to which you’re exposed, then you probably are going to get underinsured,” Wolff said. “There is no threshold for a labor law liability, and it can be really hurtful.”

He said that although risk complexity can vary, assessing the risk at the beginning is typically a minimal expense at the risk management level.

“But the consequences for failing to do it right can be quite catastrophic,” he added.

Conducting Risk Assessment

Taking risk assessment into consideration, Wolff said condo associations and co-op boards should require that no contractors walk into the building without insurance, with exceptions only in emergency situations.

Mackoul agreed. “Most of the time, nothing happens, but the one time it does, these are seven-figure lawsuits,” he said.

He pointed to an example in which a co-op building hired an uninsured contractor for a $625 job to scrape and paint a water-damaged hallway. The contractor didn’t have a ladder, so he stacked two paint cans on top of each other, fell and was hospitalized, eventually suffering short-term memory loss. The case was eventually settled for $4 million.

“This was a $600 job where a guy got on two paint cans, and he fell due to his own negligence, and it was deemed the responsibility of the property owner,” he said. “If we were another state, it would be comparative negligence where they would say, ‘Okay, well, John Smith was 50 percent negligent, and we were 50 percent negligent. We’re only responsible for 50 percent of this.’ That doesn’t happen in New York. In almost every single case, there is no defense for the property owner.”

Wolff stated this is why it’s important to allocate risk to insurance through a written contract. During the discussion, both Wolff and Mackoul broke down how these contracts should be structured.

“Require copies of policies, including endorsements from the contractors, and never trust a certificate of insurance,” Mackoul said. “Everyone thinks they are doing their job perfectly by getting a certificate of insurance, but the truth is, you’ve got to take the next step.”

He stated this is because property owners need insurance that backs up the certificate of insurance to make it clear they’ve been added as an additional insured and will receive benefits for an accident.

“Why the property manager?” he said. “He gets named in every single lawsuit. The property manager’s contract has an indemnification clause in it, which requires the association to provide a defense or pay for their legal fees.”

The board and condo or co-op should also be named as additional insured, Mackoul said. In addition, property owners need to be aware of exclusions within policies, he explained, pointing to another example when a building owner received a copy of the insurance policy for the contractor it hired, which stated anything above four stories was excluded.

“It was an eight-story building,” he said. “So technically, he had no insurance in the event of a claim.”

Specifying Insurance Type, Policy Limits

Mackoul said for this reason, contracts should always specify the type of insurance contractors have and the limit, as some homeowners insurance policies may exclude construction defects. “You think the insurance policy you have might cover it, but at the end of the day, it may not,” he said.

Mackoul said the primary type of insurance contractors should have is general liability, which covers bodily injury and property damage. General liability coverage should include at least $1 million per occurrence and a $2 million aggregate in the event of multiple occurrences, he added.

Products and completed operations insurance is also important in case of a defective product or faulty workmanship, he said, as well as workers’ compensation and even auto liability. “We’ve had situations where a contractor is running to Home Depot, speeding, makes a turn and runs somebody over,” he said. “He gets sued, and so do we. That’s the reason you want to make sure that he has auto insurance, because if we get named in a suit, we want to put it back on him.”

Finally, Mackoul explained contractors should have commercial umbrella and completed operations coverage for six years.
”Commercial umbrella is just extra liability insurance,” he said. “Nobody sues for $1 million these days. Every lawsuit we see is $5 million and up.”

The statute of limitations in New York is six years for breach of contract, making completed operations coverage for that time an important element, he added.

“That’s about the longest you can hope to usually get back to a contractor for something that went wrong that the contractor did,” he said. “Insurance needs to cover completed operations because four years from now, when the roof caves in because it was built wrong, that is a claim that I (the property owner) can bring back against you (the contractor). And when and if I do that, I want to make sure you’ve got insurance backing you up.”

Wolff said overall, the goal of taking these steps to ensure hired contractors have proper coverage is to keep insurance premiums from rising by reducing the burden of unnecessary claims.

“You don’t want to hire an uninsured contractor,” he said. “You simply don’t. In the event of a claim, that is just going to leave you with a greater effort to find the money needed to make you whole or to defend you from a third party claim.”

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Insurance Journal West September 3, 2018
September 3, 2018
Insurance Journal West Magazine

Emerging Risks; Directory: Professional Liability; Market: Residential Contractors