To quote the 1944 musical On the Town, "New York, New York it's a wonderful town!"—except when it comes to construction insurance. Does anyone really care about our problems? True, I have tried to keep all my articles nonstate specific, but after 42 years of working in our industry in New York, I felt it might be interesting to provide a state-specific perspective of the many challenges we have today in New York and how we got there.
So, why should my non-New York faithful readers really care? First of all, you never know when one of your Midwest clients, for instance, may have a major project opportunity in New York. And, secondly, the marketplace can suddenly shift anywhere. Often, wrap-ups are motivated by a single-coverage issue that may be confronting a particular jurisdiction, such as the previous California "insurance crisis" when contractors could not obtain residential coverage under their policies. In that case, wrap-ups moved to a general liability only platform. All you need to solve the problem is a simple change in a law or someone instituting a new wrap-up statute. I think you all get the picture.
While we will address New York specifics, at the same time I will also address briefly some general changes that are occurring in our business that are redefining the way we think about, procure and administrate wrap-ups. Stick around every one. This could get interesting.
While the universe of insurance companies with the expertise to underwrite large construction projects is limited, that limitation is also impacted by the type of project and location of projects. It is well known today within insurance circles that New York State is an extremely challenging location to underwrite project-specific programs (i.e., wrap-ups, general liability project specific policies, and owner's liability insurance). Statutes referred to as "labor law" have made the underwriting of such risks very difficult, and pricing models by the insurance companies have been drastically changed to protect their surplus and underwriting profitability.
The good news is that not every jurisdiction is as restrictive as New York. While all states tend to have their own less onerous challenges, the construction marketplace as a whole is much more willing to entertain non-New York risks. But that doesn't mean we can all sit back and have no worries as to the risk of construction. Quite the contrary.
Labor law has been around in New York for over 100 years. It grew out of the Industrial Revolution at a time when workers' rights were not part of the political landscape. Henceforth, a very pro-worker statute was created to protect injured workers (construction in particular). The statutes contain many provisions, but one section of the law has been extremely challenging for insurance companies to reconcile with. That section deals with the "strict liability" imposed on owners and contractors for injury arising from "gravitational" losses (such as fall from heights and debris falling on a worker). That section of the law does not allow for "comparative negligence." Even if the injured employee was partially responsible for the fall (improper use of safety equipment, for example), it does not matter. The injured party only needs to prove that the accident falls under the labor law statute. The only question then becomes: how much are the damages?
While labor law has been around for a long time, over the past 5 to 10 years, we have seen a dramatic increase in the number of such cases and the unusually high verdict awards of these individual cases. This has become a nightmare for the insurance companies. Not only are the insurance companies "per-occurrence limits" in jeopardy, their aggregate limits are being exhausted. This has caused them to rethink their pricing platforms and the amount of risk they really want to take on for these large construction projects. In addition, umbrella and excess insurers are rethinking their position on attachment points. While some primary insurers are willing to close the attachment gap, it comes with higher deductibles and, in many cases, with much of the risk being shifted to the policyholder.
Somewhat complicating issues in New York (and other states as well), is an evolving legal environment within our industry that has shaken the core of what we have believed would never change. For example, who could have imagined that a court would rule, if a "construction defect" is not an occurrence, then all resultant damage from that defect would not be deemed an occurrence, thereby negating coverage? We have court decisions resulting in terms such as "horizontal exhaustion."
Contracts need to be reviewed carefully, especially as to indemnifications and insurance requirements. Why? Because the newly revised additional insured endorsements tend to revert back to contract wording to assure coverage for the additional insured. States are enacting anti-indemnity statues that limit the shifting of liability from contractors to subcontractors.
Contractor Controlled Insurance Programs
At the same time (and especially in New York), insurance companies are very reluctant to write general liability policies with broad terms and conditions for trade contractors; the last one "holding the bag" as the indemnification clauses flow downstream. We have seen increasing numbers of trade contractors with poorly written insurance policies containing height limitations, contractual liability limitations, project-type restrictions, and labor law exclusions, to name a few.
Yes, you can almost call this a "perfect storm." But what alternatives do we have? Henceforth, the procurement of wrap-ups in New York continues to be "the procurement of choice for large construction projects. As previously mentioned, pricing models for these programs can be quite high, but they do solve the major issue of lack of quality coverage by the trades. The latest trend in New York (as elsewhere) is the growing number of contractor controlled insurance programs (CCIPs) (wrap-ups procured by the general contractor). Underwriters prefer to write CCIPs because they feel the general contractor has better control of the construction process, including safety protocols.
Brokering and Administration
There have been changes over the past generation as to how wrap-ups are handled as respects the brokering function and the administrative function. The delivery of wrap-up services was at one time within the purview of the traditional "alphabet" houses. In that traditional platform, all services were provided by the broker—brokerage, administration, safety, claims, and technology (as we look back, the technology was somewhat primitive in its initial stages). Sometime around the early 1990s, more regional insurance brokers joined the pack and recognized the value of establishing wrap-up practices.
At the same time, we began to see the evolution of "third-party wrap-up administrators." These firms took the administrative burden off of the broker, which allowed the brokers to do what they did best: brokers the deals. It was understood that the broker was still responsible for the placement of the business and understanding the more technical ends of the insurance program.
But something interesting has evolved over time. The lines have become somewhat blurred as respects the division of labor. Yes, the broker is still placing the business and the outside administrator (when chosen) is providing administrative services, but the crossover between placement and administration is sometimes difficult to decipher. Should administrators be opining on "coverage issues"? Should brokers allow administrators to do so? But, even with these challenges, change is good, especially when it provides the "buyer" with broader choices.
So, what did we learn? Hopefully you all have a better appreciation for your wrap-up "brothers and sisters" in New York and the challenges they face every day. Additionally, wrap-ups as a platform continue to evolve, and we must all need to be open to accept that, while change is difficult, it can yield positive results. Yes, New York is not the only wonderful "town" in this great country, but right now, it does appear to be one of the most challenging ones as respects how we handle risk management tools for large construction projects.
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