Insurance Mic

Scaffold Law Hearing Scheduled for May 21st

As distributed by the Independant Agents Associations of NY

We strongly encourage any interested parties that have been effected by the scaffold law over the last several years and are in the metropolitan area to attend a crucial court hearing May 21 that could help determine the fate of the state's costly and long outdated absolute liability clause in New York's labor law. The U.S. Court of Appeals of the Second Circuit will hear oral arguments in the appeal filed by Businesses for a Better New York, which is challenging the state's so-called "Scaffolding Law." The group, a partnership of construction companies and insurance brokers, is seeking to have Sections 240/241 of the state Labor Law declared unconstitutional.

The 5-year-old business coalition, in which IIABNY serves as a supporter and member, is appealing a U.S. District Court decision that dismissed BBNY's 2006 lawsuit in the fall of 2007. If the appeal is successful, BBNY will proceed with discovery in the case. IIABNY, through its lobbying efforts, has been a longtime advocate for reforming the law's absolute liability clause.

Details:

• Date: May 21, 2009
• Time: 2 p.m.
• Location:Daniel Patrick Moynihan U.S. Courthouse
                 500 Pearl Street, New York, NY10007

NY Court Supreme Court Rules Workers Comp Payout Required for Illegal Immigrants

In Benjamin Amoah v.s Mallah Management LLC , New York's 3rd Judicial Department of the State Supreme Court's Appellate Division upheld an April 2005 finding by a NY State Workers Comp Board that an illegal alien's use of fraudulent documents to get a job does not eliminate him from collecting workers compensation benefits.

Mr Amoah, a citizen of Ghana, applied for and was hired as a parking garage attendant using the drivers license and social security card of an acquaintance. Mr Amoah suffered an injury in April 2005, although court records do not describe the nature of the injury. He was awarded workers comp benefits. Soon thereafter, Mr Amoah notified the workers compensation carrier of his real identity at which point the carrier contested the benefits because the claimant used fraudulent documents to obtain his job.

The insurer and the employer argued that federal immigration law outlawing the use of fraudulent documents pre-empts state mandated benefit awards. The Appellate Court stated it had to determine whether federal law on using fraudelent documents pre-empts workers comp law under a doctrine of "conflict pre-emption", essentially trying to establish whether state law obfuscates the intent Congress has set forth. In a Business Insurance article dated 11/24/2008 , Rusty Watts , a Worker's Comp defense attorney at Swift, Currie, McGhee & Heirs LLP stated , " in addition to New York, courts in several other states, including California, Florida, Georgia, Minnesota, and Pennsylvania, have ruled that the Federal Immigration Reform and Control Act adopted in 1986 does NOT preempt state mandates to provide Worker's Comp benefits."

Since Mr Amoah is totally disabled, there is no evidence the award would require him to violate, or continue to violate federal law that may preclude him from returning to work. It's interesting to note that had he not been permanetly disabeld the outcome may have been entirly different. Wage benfits typically are based on a claiments inability to continue to earning a living due to a work related injury or disability, however what happends if the worker cannot return to work due his status as an illegal alien. The current trend is that insurers and employers alike are arguing that they should not have to pay wage benefits or provide light duty employment to illegal immigrants because their inability to work is not due to the injury but the fact that it is illegal to employ immgrants that do not have legal working status in the United States.

According to Bruce C. Wood , associate general counsel & director of workers compensation for the American Insurance Assn in Washington, in an article published in Business Insurance , "Court battles over providing workers comp benefits to illegal immigrants seems to be narrowing around whether employers can stop paying indemnity benefits without retaining workers or providing them with vocational rehabilitation."

Typically the goal is to try and get these injured workers placed back on the job, however doing so is in direct violation fo federal law which creates this conundrum. The American Insurance Association is updating a state by state analysis on benefit entiltlements for Illegal Aliens which we expect to be released in January. I will try and post it once it becomes available.

Thank you to Roberto Ceniceros whose diligent reporting in Business Insurance contributed greatly to this post,. Much of the text and sources were taken from his work.

The Inherent Coverage Gap in Design Build Insurance Programs

First it’s important to distinguish between the two most basic Developer / General Contractor business models, Design, Bid, Build, & Design Build. In Design, bid, build the owner typically has an architectural design done for the project, at which point they solicit bids from various general contractors to build the project, also referred to as lump sum bidding. Clearly, we are not breaking new ground here pardon the pun.

In a Design Build business model, the owner contracts with one entity for both the design and the construction of a project. The design builder can be a contractor, a design firm, or collaboration between both. The common philosophy here is the integration of design & construction.

If you are still questioning which model fits some or all of your projects, the question I would ask is who is paying the design/architectural firm? If it’s the owner, then you have less risk (Design, Bid, Build). If it’s the G.C., then the risk profile dramatically increases and it would resemble a (Design Build) model.

A Design Build project delivery offers significant change and imposes new risks upon the participants. To understand the nature of these risks it is necessary to understand the fundamental differences in the roles and relationships of the parties to the design and construction process. Under Design, Bid, Build there are separate duties, separate responsibilities, and separate goals. Under the Design, Build model, you have the paradigm of mutual duties, shared responsibilities and goals. Those of you in the industry are well aware of the distinct differences, however I wanted to clarify the point to establish a clear definition between the two, ultimately highlighting the difference in the risk profile of the two business models which is really the point of this article.

Under the Design, Bid, Build model, a project owner provides the contractor with completed design specifications for the project. These documents set forth measurements materials, methods, and processes or other specific information needed to construct and produce the desired building. In keeping with the United States Supreme Court ruling in United States v Spearin, the project owner who furnishes plans and specifications warrants that they are sufficient for their intended purposes, and that if the contractor adheres to the specifications, the desired result will be achieved. Any design-related omissions, errors, or deficiencies in the specifications and the drawings are the responsibility of the owner.

In Design, Build the owner provides the design builder only with performance specifications that lay out the operational mechanics of the project and provide the standards the contractor’s work must meet in order to deliver the owner’s desired result. Here is the critical difference in risk between the two business models; unlike pure construction contractors, design builders cannot invoke an implied warranty that the specifications and plans provided by the owner, if followed, will produce the desired product without defect. The Design Builder accepts the responsibility for the design and construction that will produce the product set forth in the owner’s performance requirements. The ability to transfer much of the liability for the adequacy of the design to the design builder is one of the greatest advantages to owners of the Design Build method.

Although in most cases the design work is often provided by an external design firm, the design builder has little common law protection from its design consultant. The criteria applied to design professionals in determining liability for design deficiencies is whether the party met it’s legal standard of care. The traditional standard of liability for the design professionals is one of “negligence, which is a much lower standard of care than the implied warranty the design builder provides to the owner. As a result, the Design Builder has a huge potential gap between its liability to the owner, and it’s ability
to seek protection and reimbursement for the defective design from the design consultants.

Design Builders can seek to impose a higher standard of care on the Architects & Engineers contractually, but most will resist. In addition most architectural and engineering firms have a minimal net worth and no real assets, so any attempts to contractually impose a higher standard of care on the designer are of diminutive value. Lastly, Architects & Engineers professional liability insurance typically only covers negligence, and almost always excludes contractually assumed liabilities that exceed this standard. The bottom line is that Design Builders often face a perilous gap between the design liability they accept for the project, and that, which can be transferred to the design professionals.

Now that I have raised the question, what’s the answer? What we espouse is a well-crafted Construction Errors & Omissions Insurance policy that will contemplate these additional exposures, and more importantly provide a pool of capital to tap in the event in your Design Build model results in a design deficiency that results in either physical or economic damage due to poor or inadequate design. In absence of this insurance contract, or pool of capital, the G.C. or Developer will fund the design remediation, and reimburse owner for costs and expenses.

We urge our clients to vet the Construction Errors and Omissions policies carefully as they differ dramatically in coverage, and pricing. Please consult an educated broker or insurance advisor that is both conversant on the exposures you face, and the placement of these specialized insurance contracts.

Should you have specific questions on this post, you my email directly: mstoop@bncagency.com

Use Caution When Approving Additional Insured Endorsements Issued 2004 and Beyond

In July of 2004 the additional insured endorsements had a significant change that may have a dramatic impact on the various construction firms using them. The concern emanates from the substitution of a few select words, "arising out of" versus "caused, in whole or in part, by". I can spend quite some time on the nuance of this change, but I want to focus most of the attention it's effect on New York Labor Law Claims ( Third Party Action Over).

The substitution of "arising out of" versus "caused, in whole or in part, by" substantially narrows the scope of the endorsement's coverage significantly in my opinion. The injury or damage under Additional Insured endorsement CG 20 10 07/04, must be " caused by in whole or in part" , not just the named insured's (Entity Issuing the Cert) ongoing operations (as in the current endorsements), but by the named insured's "acts or omissions" in the performance of those operations. It may be interpreted, absent any fault of the Named Insured, there will be no coverage for the Additional Insured.

If this proves true, it may be problematic in how insurance companies will apply the new endorsement to third party-over actions ( Labor Law) claims. These claims typically involve actions by employees of named insureds, such as sub-contractors, against the Additional Insureds such as General Contractors and/or owners. This is one of the largest exposures to loss construction firms face, with the average awards increasing dramatically,(see table). They often allege failure to maintain a safe work place, with the general contractor / owner having additional insured status in the sub contractor's general liability policy. These claims have been historically covered under the pre-2004 additional insured endorsement. The employee is typically not allowed by workers compensation statute to bring suit against his employer, alleging only negligence against the additional insured (general contractor/owner). The big concern is that since the suit does not allege any degree of fault or negligence against the named insured ( entity issuing the cert) subcontractor/employer, insurance carriers can take the position that the employee of the sub's injuries were not "caused in whole or in part" by the subcontractor (Entity Issuing the Cert).

Naturally, the subcontractor (Entity Issuing the Cert) will usually have been somewhat at fault even though the suit does not contain allegations against it. State laws typically vary in the obligation they place on insurers to seek beyond the allegations in the suit itself to see if a duty to defend exists. Typically the duty to defend is much broader than the duty to indemnify. The only allegations that would fall clearly outside the coverage provisions of the new additional insured endorsements (07/04 Edition) would be explicit allegations of the additional insureds sole fault. In most cases insurance carriers should consider facts beyond the allegations in the lawsuit to determine if coverage applies under Additional Insured Endorsement CG 20 10 07/04. If their named insured's (sub-contractor) acts or omissions contributed to the bodily injury or property damage, they should defend and indemnify on behalf of the additional insured even though these acts or omissions are not mentioned in the underlying suit. We may see an emerging trend whereby additional insureds attempt to prove some degree of culpability against their sub-contractors to obtain coverage under the sub-contractors general liability policies.

We realize in writing this article how difficult it is to procure these certificates in the first place. Where you can exercise the control, it may be best to request or contractually dictate that the subs cannot use this particular additional insured endorsement , CG 20 10 7/04, Instead request CG 20 10 11/85.

For more information on which additional insured endorsement to use click here.

All Additional Insured Endorsements Are Not The Same

Having the right tool for the job is imperative if you are in construction. Having the correct additional insured endorsement protecting your interest is absolutely critical, saving hundred's of thousands of dollars in most liability claims situations. The fact is most of the Development / General Contractor companies I consult with spend countless hours, and thousands of dollars on their construction contracts. Conversely the task of making sure there is a pool of capital from the sub-contractors in the event of a claim , as they flash that fancy contract is often overlooked or misunderstood. The goal of this article is to highlight the various differences between all the disperate additional insured endorsements, and make a recommendation as to which one you should request depending on which side of the transaction you fall on, and what you agreed upon in the contract you signed, and to whom. I will endeavor to give you the knowledge, you negotiate what you can in your companies best interest. If you have a staff person dedicated to managing the sub contractors Certs, make sure they book mark this post and download this table for future reference. Due to the software limitations I was unable to translate directly this table, so please down load the file for the rest of this to make sense.

Please click on this file to view and download : Evolving Coverage Standards for Additional Insured Endorsements Evolving Coverage Standar-2.doc

Some notes of interest on the various terms that have a substantial impact on the coverage afforded to the additional insureds. Pay attention to "your work" v.s. "your on going operations". "Your work" has been interpreted broadly to include both work in progress and work that has been completed. Thus the end result would be that coverage would be available to the additional insured (entity receiving the certificate) long after the work by the named insured ( entity issuing the certificate) has been done. Conversely if the Additional Insured endorsement only affords coverage for your "On Going Operations" , then once the job is complete your status as an additional insured ends, irrespective of how your contract reads with the sub, which is why it is critical that the sub-contractors policy meet the obligations set forth in the builder contract.

If you are a General Contractor / Developer/ or Building Owner CG 20 10 11/85 is the specific additional insured endorsement that you should require any construction entity below you on the food chain to carry for the reasons noted above.

If the carrier insuring the sub contractor or GC is unwilling to issue the CG 20 10 11/85 endorsement, you may request that the carrier issue CG 20 37 10/01 (Titled Additional Insured - Owners, Lessees Or Contractors Completed Operations. which adds the Products & Completed extension. without this endorsement, you will lose your status as an additional insured the moment the final check is cut, and the job is deemed complete by that particular sub-contractor or G.C. If you are the building owner. This is used in tandem with CG 20 10 ( Various Issuing Years). This is not as good as the (11/85) version because of the revised "arising out of " language was changed to "caused in whole or in part by acts or omissions of the named insured", which first appeared in the 2004 revisions. For more on that topic, I have devoted a whole article on the 2004 Additional Insured Revisions. Click here for the post (forthcoming).

If you are a Trade Sub-Contractor, I would think you would like your obligation to the job to cease once the work has been completed. Therefore it's in your best interest to use one of the narrower additional insured endorsements. If this is your chosen path, please be certain the contract you signed with the owner or G.C. is consistent with your narrow additional insured endorsement, other wise you will have promised contractually a dollar, but in effect will deliver only pennies. Remember, insurance is only a financial instrument meant to cover your contractual promises and obligations made to your clients. Make sure your insurance policies are designed and will meet the promises you have made, or you will not be in business long should you have an accident .

Case Study of a Job Site Liability Claim.

A worker, while cutting a piece of ribar, safety glasses absent, obtains a piece of debris in his eye. He informs his boss (Masonry sub-contractor), who then informs the site supervisor. The gentlemen is sent to a local hospital to get checked out. The hospital rinses his eye and sends him home. He reports to work the next day, all is right with the world. The incident report is logged into the job's daily activity, but no Notice is given to any liability insurance carrier. Notice was filed with the sub's comp carrier for reimbursement of treatment received. Does this sound familiar? Sounds like the majority of the job sites in the country, accept in the great State of New York, where the story continues due in part to the Labor Law.

Several weeks go by and the workers vision begins to fail incrementally. He mentions nothing to anyone, not wanting to risk his job or wage. Shortly there after he develops a serious eye infection that put's his eye in jeopardy. He is fails to show up for work because he is hospitalized. Several weeks, several surgeries later the worker emerges, informing his employer he will not be returning to work, his is going out on disability, how do we file the claim? The Steel Sub-Contractor notifies his disability carrier, and his comp carrier (again) , updating them on this news. The sub fails to notify the G.C. of this critical update, simply slipping his mind. He also never notified his Liability Carrier. The broker that handles the liability insurance for the sub is different than the broker who handles his worker's comp, again, sound familiar?

Quiet months pass, until the thud-some sound of legal papers being served echos in the offices of both the G.C. and the Steel Sub-contractor. Bewildered first thing they do is call their respective General Liability insurance brokers to deliver the loathsome news. Having received these calls thousands of times myself, the first questions I ask is when did this happen, did you know about it, and is there a paper trail documenting your knowledge? You can actually hear the guy blink on the other end of the phone, then panic starts to creep in. Are you telling me I may not be covered, why I am paying all this insurance premium for?

What transpired was the employee filed suit against both the G.C. and the Sub-Contractor, under the New York State Labor Law , alleging grave injury which this fits the classic definition. Since the Steel sub-contractor signed a hold harmless agreement with the G.C. promising to defend and indemnify him in the event of an employee based suit, the Steel Sub-contractor has a legal obligation to defend the G.C., and if they lose in court, then the Steel Sub-Contractor may be responsible for some or all of the judgement awarded. All of this is fact, and understood at the time the job was awarded. The problem arises because both the Steel Sub-Contractor, as well as the G.C. never gave proper notice to their respective general liability carrier.

Under the terms and conditions of almost every insurance contract there is an obligation by the insured ( G.C. & Sub-Contractor), under each of their respective insurance policies that stipulate you must give the insurance company proper notice of any incident or occurrence, this applies incidentally to additional insureds as well, put that's a whole different topic. This clause protects the insurance company by allowing them to jump on, and procure information quickly on a claim that they may have to defend and litigate at some future point. The longer the time period between when the incident occurred, and when the company was put on Notice, the less chance they will have to build a proper defense. Information, witnesses, and potential material facts become contaminated with the passage of time. I will speak at length about Proper Notice, and the Declination of Coverage in a future post. Suffice it to say, the carrier for the G.C. and the carrier for the Steel Sub in all probability will decline coverage based on improper notice of loss.

The G.C. should have reported to their carrier same day the incident was filed, having no knowledge of where the claim may lead. Although the G.C. is counting on the sub's carrier to step up, you cannot rely solely on that. The G.C. should always use their policy as a safety net. The upside is they can control their financial destiny, in absence of that, their financial destiny is in the hands of a sub contractor. Similarly the sub-contractor, aware of their promise and obligation to the G.C. must always be cognizant that any workers compensation claim may lead to a labor law claim, which will always lead to a liability claim.

In Conclusion: If you are the G.C. there should always be a closing disposition report on any job injury. As part of that closing report there should be a box that states something like "reported to G.L. Carrier" or "Reported to G.L. (General Liability) Broker." This will force your staff to recognize the importance of at least having the conversation with respective to future obligations that may appear from this particular injury. It also forces the G.C to close out , or track any job site injury for a change in condition. Hint, back injuries, and eye injuries are almost always reported to the G.L. carrier.

If you were the Sub-contractor here, be mindful of your contractual obligations, and remember to discuss all Worker's Comp claims with your Construction Liability Advisor. Make it protocol that all C-2 forms ( Workers Comp Claim Forms) are sent to both the Liability Broker and the Comp Broker if they are different. Best advice is to think of all Workers Compensation Claims as potential General Liability claims, handling them with care.

Insurance Carriers That Are Known To Exclude Contractual Liability

These carriers are known to have excluded contractual liability in the past. This is critical for the General Contractor/ Developer and sub-contractor to know.The general contractor typically has indemnity agreements  with the sub contractor making certain obligations and promises in the event of a claim or occurrence. It's critically important that your "sub-contractors" insurance policy contain contractual liability coverage so their insurance carrier can make good on the obligations and  promises made in the sub-contract agreement. If your "sub-contractor's" policy excludes this coverage, you the General Contractor and or Developer still have the financial obligation to pay. Difference being instead of their  insurance carrier paying, your insurance carrier pays driving up your insurance costs at renewal. If you are insured with Everest, you may not have coverage at all.

If upon review your sub-contractor is insured by one of these carriers I suggest you take a much closer look. Order a copy of the forms and endorsements section of their policy , or contact your broker for their advice. Your efforts could be worth tens of thousands of dollars.

This list is not the end all, be all, but it's fairly accurate. It is a combination list distributed to me by both the Claims Department at Harleysville Insurance, and  John Hannum of  Hawkins Feretic & Daly, LLC  in Manhattan.  Thank you folks !                                                                           

Admiral ( Subcontractors Warranties) May either exclude coverage for sub contractors if the subs coverage does not conform to the requirements set by Admiral or the may charge their insured   at the rate the sub would pay.)
Atlantic Casualty ( Exclusion of injury to employees, contractors and employees of contractors. They also have classification limitations/exclusions.)
American Safety 
Berkley Specialty
Burlington ( Cross Liability exclusion-amended to include any employee of any insured.)
Colonial Co-Operative
Colony
Cover X First Mercury  (May offer buy backs for coverage, need proof by endorsement)
Erie & Niagara (Contractual Limitation)
Essex Ins. Co. ( Contractual limitation, independent subcontractors and their employees, including leased works.)
Farm Family
First Mercury
Hartford ( Need to look at the forms and endorsement section of the contract, coverage limitations vary by class)
Hermitage
Hudson (Third Party Action Over Exclusion)
James River Ins Co. Classification limitations, sub contractors warranty
Merchants " Handyman Program" Contractual Limitation & Exclusion to employees injuries
Mount Vernon Fire
Mountain Valley indemnity Company ( Preserver Group)
Mt Hawley w/ MCF Policy pre-fix Beware of contractual liability limitation.
National Casualty Employers liability exclusion amended " This exclusion does not apply to liability assumed by the insured under an "insured contract"
National Fire & Marine Contractual Limitation
North Sea
Nova Casualty
QBE Non-Admitted
RCA
RLI / Mt Hawley
Rutgers  Casualty
Scotsdale Some Scotsdale policies will offer the proper coverage, need to check the forms and endorsements to vet the contract.
Selective   ( Need to look at the forms and endorsement section of the contract, coverage limitations vary by class)
Everest America Sub contractor's Warranty & Classification Limitation Endorsements )
TIG
Tower Insurance Company
Tudor
United National Residential projects exclusion ( all habitational)
US Liability Ins Co.
US Underwriters
Utica First  Exclusion of Injuries to employees
Valley Forge 
 
 

To be certain, order a copy of the policy from the sub, and have your insurance advisor read it.

Minimum and Deposit in The Free Trade Zone

I recently had a very interesting case come across my desk for an opinion. The situation was this; a construction company bound their renewal quote with a Licensed & Admitted Insurance Carrier in the State of New York. The carrier Sirius America was operating in the "Free Trade Zone" , which is to say they did not have to use the rates filed with the NY State Insurance Department, however they still needed to meet the minimum standards set forth by the department for both forms and rates. The policy contained a Minimum & Deposit endorsement which is unusual for a Licensed & Admitted New York State Carrier, however because they were operating in the free trade zone, apparently the State let them use the endorsement.

One month into the Sirius America policy the Construction Company was notified of a delay in a project they were awarded. This delay would significantly impact their numbers for the policy period. They allegedly contacted Sirius America and tried to adjust their exposure basis downward. The carrier Sirius America, allegedly denied their request. Eight months into the policy , the Construction Company cancelled their insurance policy and moved to another carrier. Sirius came in promptly and conducted their audit. The result of the audit revealed what the client already knew, their numbers were down significantly from what they initially projected when they bound the policy.

Under normal circumstances with in the friendly confines of the NEW YORK STATE INSURANCE DEPARTMENT, this insured could expect a refund consistent with the actual, not projected exposure base, which in this case was sub contract cost, and payroll. The amount of money due back to this Construction Company was north of $200,000. However instead of a check, they received an audit statement that revealed the insurance company, Sirius America was allegedly keeping the premium. The apparent reason, although it was not specifically stated, was the Minimum & Deposit endorsement on the policy stating unequivocally in endorsement IL 12 01 11 85, " It is understood and agreed that this policy is written on an adjustable basis subject to an annual minimum and deposit premium of _____ . For purposes of this policy, the term minimum and deposit premium shall be defined as follows:

Deposit Premium: That premium which is stated in the policy declarations and payable in full by the insured at inception of the policy.
Minimum Premium: Is the lowest amount for which this insurance will be written for an annual period, (applicable to such classification(s) as indicated on schedule.)

There are a lot of issues we can address here, however for purposes of this discussion I will focus on two. First, please be very careful of the minimum & deposit endorsement. If not managed properly it can cost you plenty. To brush up on the fundamentals of the endorsement, and on how to manage it please click on this link: Managing the Minimum & Deposit Endorsement. The second issue which I will touch on further which is even more interesting, is the endorsement being legally applied?

In an informal opinion issued by the Office of General Counsel on March 27, 2002 representing the position of the New York State Insurance Department regarding the Minimum & Deposit Question " The Department has approved minimum earned premium endorsement filings (which may include an annual minimum and deposit premium endorsement) where the insurer has provided supportable evidence that the minimum earned premium equals the cost associated with issuing the policy. The purpose of allowing minimum earned premium is to permit the insurer to recover the expenses of writing the business should the policy be canceled prior to expiration, or, in the case of an auditable policy, where the audit results in a premium lower than the amount needed to cover the cost of writing the policy. "

As a footnote the Insurance Department for the State of New York understands an " annual minimum & deposit premium to be the premium an insured has to pay as a deposit on the policy, which is also the minimum dollar amount that the insured will be charged as a premium regardless as to whether the policy is written on an auditable basis, or cancelled prior to the expiration date of the policy.

The question at the heart of the matter as I understand it is the following; can Sirius America, a licensed and admitted carrier in the State of New York, operating in the free trade zone, retain more premium, than the auditable exposure permits?

The simple answer may be yes they can, however it cannot be more than the cost of issuing the policy. My initial thought was the company was not properly applying the sprit and intent of the department. By retaining in excess of $200,000 in premium for exposure they didn't have seemed to me excessive. They appear to be broadly applying the endorsement well beyond it's intended use. How can Sirius America assert and justify that it cost them in excess of $200,000 in administrative expenses to issue this policy? As I write this article the strict application of this endorsement is being argued to the State Insurance Department, and perhaps Civil Court. I have to believe wisdom and common sense will prevail, however I have seen it fall both ways.

The fact that this transaction had taken place in the "Free Trade Zone" apparently has no consequence according to this same opinion written by Sally Geisel, Office of General Counsel. " Although the rates and policy forms for insurance written in the "Free Trade Zone" are exempt from filing, an insurer is still bound by the same standards of fairness that are applied to rates that are required to be filed. Comp. Codes R & Regs. tit.11§ 16.5 (1995) states:

The rates applies (SIC) to policies issued pursuant to section 6301 of the Insurance Law shall not be excessive, inadequate, unfairly discriminatory, destructive of competition, detrimental to insurer solvency, or otherwise unreasonable. Each insurer shall maintain in it's files the premium charged for each special risk and the basis of for the rate or premium.

She further states, "Thus, such an insurer may not charge a minimum earned premium that exceeds the cost associated with issuing the policy. Additionally, such insurer may not charge a percentage based (rather than a flat charge) minimum earned premium unless the percentage actually measures the cost associated with issuing the policy. "

In Conclusion :

It is my personal opinion that companies who seek to charge more than the cost of issuing the policy are in direct violation of New York State Insurance Law, when they seek to retain premium instead of issuing proper audit refunds to their construction clients. The impact of the "Free Trade Zone" on the application of the Minimum & Deposit endorsement appears to be negligible. It will take a few cases like this one, and perhaps the Attorney General's Office stepping in to enforce fair and equitable practices, before you see carriers like Sirius America act responsibly. This is why it's so important that the insurance buyer be as informed as they possibly can. Your best strategy is avoidance when at all possible.

For a copy of the Office of General Counsel informal opinion, please email me : mstoop@bncagency.com

The Minimum and Deposit Trap

Imagine guaranteeing the IRS that you will pay at the very least the same taxes you paid last year. If you make more money this year, the IRS will invoice you the additional taxes owed. If you make less money this year, too bad, no tax refund forthcoming. You know the IRS would love that situation, thankfully however that would be illegal, unless of course you are an insurance company.

Since most contractor liability policies are audit-able, the premium you pay in any given year is an estimate, and not a firm number like for example your auto or home insurance policies. Since they are audit-able the "basis" ( i.e. payroll or gross sales) pricing factors are just an estimate for what you think your actual numbers may be in the upcoming policy year. Your true "insurance cost" is determined upon audit, which is conducted typically 3 months after the policy expires. The company sends out an auditor to look at your records, they file a report to your insurance carrier confirming both the class codes used, and the final "basis" numbers. For example if your policy premium was based on an estimated gross sales of $ 1 million dollars, upon audit it is revealed that your actual gross sales came in at $ 1.2 million, the auditor would let the insurance company know that, and they in turn would invoice additional premium to cover the additional "exposure". Anyone involved in Construction knows this drill, it works the same way with Workers Compensation. I thought I would define the audit process to assist in understanding the next and most important point.

In the last several years more and more contractor's liability policies have been written outside the friendly confines of the New York State Insurance Department. If you have one of these policies there are several clues that give it away. First, it should be on the written proposal from your current broker. It should say, "Carrier Not Licensed Nor Admitted In the State of NY". Secondly, you will have signed several acknowledgment forms which state such, one being a "Total Cost Form" which shows all of the taxes and fees charged when doing business with such a carrier. Lastly, and probably the most obvious, there will be a big red stamp on the front of the policy that states "this insurer is not licensed nor admitted in the State of New York". You can also go to this site NY State Authorized Insurance Carriers , and do a search to see if your insurance company is licensed.

I plan on doing a whole article just on the difference between doing business with an "Licensed & Admitted Carrier" , and "Non Licensed and Non Admitted Carrier" , until then suffice it to say be very careful when you are playing with a "Non Licensed and Non Admitted Carrier" , for the simple reason a lot of the consumer protection laws set up by the insurance department to protect you the insurance buyer do not apply. "Caveat Emptor" "let the buyer beware is the rule when you purchase a policy from a "Non-Licesened and Non Admitted Carrier". Minimum & Deposit" is one such example of why you must be very careful.

Minimum & Deposit basically states that irrespective of what your audit reveals, the minimum premium you the insured will be pay is (x), which is usually 100% of the annual quoted premium. Remember my prior example that states if you make less money the IRS doesn't care you still need to pay taxes on the previous years earnings because they were higher? Similar logic with minimum & deposit. If your audit reveal that your gross sales where only $500,000 as opposed to the $ 1 million you projected, you have guaranteed the insurance company that you will pay at the very least insurance premium on $ 1 million of gross sales. In this example not only will you not get a refund, but your insurance cost came in double as a percentage of sales, thus eating into a significant portion of your profit. In this example the percentage of liability insurance cost to gross sales went from 10% to 20% , if the annual premium is assumed to be $100,000.

Managing the Minimum & Deposit Endorsement

It's imperative that you the Construction client are aware of the effects this endorsement can have, and figure out a way to manage it. You can't manage what you don't know.

1) Don't commit to an unrealistic basis. If the policy is based upon gross sales, use only work 80% of work on hand as your basis. Apply the same rule of thumb to sub-contract costs, and or payroll if that is your basis. I offer 80% to give you a 20% spread for margin of error. What happens if you aren't paid timely from one of your owners, and the large check hit's your books after the policy period ended? You will pay for the insurance twice. Once in the prior period where calculated it in your estimate because it's a guaranteed number, and the other in the current period, because it will now be picked up on audit as current revenue, so you will pay premium again.

2) Estimate in your exposure basis only those signed and executed contracts that are guaranteeing a certain revenue flow. One contractor I consulted with used an upcoming job they expected to get in their "estimated exposure basis" or gross sales/sub contractor costs, only to find one month into the new policy the $13 million award did not come thru. The company, Sirius America, refused to lower their "basis" down , thus they were forced to pay premium on revenue they didn't have. Don't count your chickens before they hatch.

3) Try to negotiate the percentage of the "minimum & deposit" down from 100% of estimated exposure, to at the very least 80 %. i find that most carriers will give this concession if you ask for it You don't ask, you don't get.

4) Do a mock 6 month or 8 month audit of your exposure basis to see where you may end the policy year. If you are a head of projections see if it makes sense to hold revenue back. If you are behind projections, to the point you won't hit your minimum& deposit projections, see if you can escalate some of your payments from your owners. Talk to your accountant on some other strategies for hitting your threshold. Some of our clients are working on razor thin margins. A few points here or there can make an enormous difference.

The real goal of this piece is to make Contractor's , and Developers aware of how this endorsement can affect their profitability and results. If it's not managed, it becomes a huge tax!

The Difference Between Additional Insured and Certificate Holder

It’s amazing how few business owners know the distinction between being a Certificate Holder on a vendor or sub contractor’s policy, and being an Additional Insured. There is a clear, and measurable difference between these two Certificate of Insurance functions. I will try and keep it as simple as possible.

Certificate of Insurance simple shows you proof that the “Named Insured” actually has insurance. Think of it as your sub-contractor gets pulled over, you ask him for his insurance I.D. card, (certificate of insurance) proving that he does in fact maintain insurance. That’s all a Certificate Holder really is, someone who is provided proof the sub has insurance.

Additional Insured is a whole different matter. As an “additional insured” you are actually given coverage, and have rights under the sub-contractor’s policy in the event of a future claim. Some carriers will charge the sub-contractor a premium for this privilege because they are actually conferring coverage.

Bottom line Certificate Holder is simply proof of insurance, where as Additional Insured status gives you coverage and rights under your sub-contractors policy.

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