One of my favorite phrases remains, "I am always amazed, but I am never surprised". This axiom proves true for many of the construction clients I advised, and for the legislators in Albany that have created this hostile business environment for builders, contractors, and developers thru their refusal to amend, or better yet strike down Labor Law 240 & 241. The Labor Law revisions that were enacted September 10th, 1996 thru the Workers Compensation Reform Act 1996 are really the smoking gun that is responsible for the majority of the liability insurance premium increases that most contractor, developers, and general contractors now must deal with.
What is Labor Law 240 & 241 ? (The Cause)
Essentially it's Albany's gift to trial attorney's, let me explain. According to Phil Larocque, President of New York State Builders Association, "New York State courts, pressed by the trail lawyers and some building trade unions, have interpreted section 240 of the labor law to make the general contractor, builder/developer, and site owner " absolutely liable" for grave employee injuries. NYSBA believes that any worker legitimately injured on the job due to negligence on the part of the builder, contractor, or owner should be compensated accordingly, but the current law does not provide a fair playing field for a builder that is facing a lawsuit."
Technically speaking "grave injury" is defined as : death, permanent and total loss of use or amputation of an arm, leg, hand or foot, loss of multiple fingers, loss of multiple toes, paraplegia or quadriplegia, total and permanent blindness, total and permanent deafness, loss of nose, loss of ear, permanent and severe facial disfigurement, loss of an index finger or an acquired injury to the brain caused by an external physical force resulting in permanent total disability. For more information on a summary of the statutes, see Summary of Critical Labor Law Statutes
By applying "absolute liability" the only question that needs to be resolved for the injured worker, and their attorney is how much money or damages in legal parlance, they will get.The general contractor, developer, and site owner never get the opportunity to defend themselves in a court of law, they are absolutely liable. Most law suit decisions are based upon a " negligence standard" , to determine fault. Once fault, or an apportionment of fault is determined, if any, then damages are awarded based on the degree of injury. What makes this "Absolute Liability Standard" so oppressive is that the other side does not get to argue their case. It's pass go, and collect a large sum of money. Trial attorney's rarely have to go to trial, and when they do it's to get more money than is offered. They do not have to prepare a case for trial, they just collect a large settlement fee for very little effort. It's a money printing mechanism for trial attorney's. Imagine a system where your wife was always right, and you were never able to give your side of the story, you just paid up. Most of you are smiling right now because I just described the vast majority of households, mine included. My wife will never read this, so I am not concerned.
HOW THE LABOR LAW EFFECTS THE COST OF LIABILITY INSURANCE (THE EFFECT)
It took the insurance industry several years to realize that the Workers Compensation Reform Act of 1996, was having a dramatic impact on both the frequency, and severity of the claims they were receiving from their construction clients. C.N.A. in particular was brought to it's knees because they were slow to react to the new environment. The net result was that most all of the insurance carriers who underwrote construction had left the market, which resulted in a classic supply and demand squeeze. The construction market was left with the Inter-Rico program which at the time was Insurance Corp of NY, then Sirius America, and now Everest, and a few others that could charge whatever they wanted in premium, and could get it because there were no other liability carrier options.
Flash forward six years later to 2006, and there are still only a few players, who are giving decent coverage. There is still a supply and demand squeeze going on where the demand exceeds the available product (liability insurance), creating an artificially high market. However there is also a valid question by the insurance carriers about how much to charge for the risk. The law change in 1996 has no historical actuarial basis which would translate into the correct pricing for the risk. Remember the whole science of insurance is based upon actuarial analysis of risk. The law revision changed the whole paradigm from a negligence standard which is fair, equitable, and measurable to an absolute liability standard that does not allow the insurance carriers to defend themselves, and their construction clients, resulting in many claims that would under ordinary circumstances would not be paid. Left with that system in place, the carriers are only guessing how much to charge, (unmeasurable), since this absolute liability system has never occurred before relating to the labor law. Remember it's a simple equation for insurance carriers, gross premiums taken in , subtracted by the gross losses (claims), equal their underwriting profit. The net effect is high prices, which will remain in place unless we can get more insurance carriers to enter the market place. More competition will create pricing pressure, resulting in lower liability rates for the Builder, Developer, and Owner.
IN SUMMARY:
The Workers Compensation Reform Act of 1996 changed the landscape for employee job site injuries, allowing workers to sue for "grave injuries" which were otherwise covered by worker's compensation, to now go outside that Workers Compensation system and into the Tort system. This resulted in law suits and liability claims for vast dollar amounts that were not contemplated in your construction liability insurance rates before. The response by most carriers was to leave the construction marketplace, and focus on underwriting less hazardous classes of business. This confluence of events created a supply and demand vacuum , creating an artificially high market for the remaining carriers that could get any number they wanted. The law change also left in question what rates would allow an acceptable underwriting profit , considering there is no historical actuarial reference point. The net effect is high prices, which will remain in place unless we can get more insurance carriers to enter the market place. More competition will create pricing pressure, resulting in lower liability rates for the Builder, Developer, and Owner.
