Why Your Building's Insurance Costs Keep Skyrocketing

No building is ever really prepared for a contractor accident, but you can be proactive about keeping your building protected. Howard Schechter, partner at Fox Rothschild, breaks down the critical concept of risk transfer and why it could save your co-op or condo from devastating financial losses. Learn why New York's unique Scaffold Law has made insurance premiums skyrocket and discover the surprising gap between what boards think they have and what they actually need. From apartment alterations to major renovations, this episode gives you actionable strategies to ensure your building doesn't end up holding the bag when accidents happen. Habitat’s Carol Ott conducts the interview.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Carol Ott: Welcome to Legal Talk, a conversation about governance issues that New York's co-op and condo boards are tackling today. I'm Carol Ott with Habitat, the New York City magazine for co-op and condo board directors. My guest today is Howard Schechter, partner at Fox Rothschild. Risk is the hot potato that everyone is trying to pass.

And if your co-op or condo is left holding it, be prepared for a big financial hit. Howard, where does risk come from and how do you make sure you're not stuck with it? 

Howard Schechter: Hello, Carol. Thank you for inviting me. The easy part is what is risk? The hard part is who ends up holding the bag and paying for it.

When we're talking about risk, what we're really talking about is activities that are going on your property that could result in a claim or damage of some kind. Somebody's on the property doing work. Usually it's a contractor. It could be the unit owner or shareholder doing an alteration in the apartment, and there's a chance that an accident is going to happen.

Somebody's going to fall off a ladder, drop a hammer. Drop a brick off the building and land on somebody's head on the sidewalk, drill into the wall and puncture a pipe that shouldn't be punctured. All of those are risks and the cost of repairing the damage that's caused by it, or the injury that's caused by it as the issue that we're discussing.

Who's going to pay that? 

Carol Ott: I'm assuming insurance pays for it. 

Howard Schechter: Hopefully insurance pays for it and hopefully everybody who's involved in this situation has their own insurance, which of course makes it much easier to resolve these questions. But yes, the general answer to the question is your insurance is expected to pay for it, and that's why you carry insurance.

However, the amount that you pay in premium for your insurance is dependent in part on what's called your loss history, which means the number of claims that you've submitted to your carrier and the number and amount they've had to pay. If you've got a bad loss history, your premiums go up dramatically, or you may even lose coverage with the carrier that you have.

So what you wanna do is see if you can limit the number of claims that you are making on your own insurance. The way to do that is by transferring the risk to somebody else. 

Carol Ott: And how do, how does that exactly happen that you transfer this risk? 

Howard Schechter: First of all, you have to recognize that the primary person who's responsible for the damages, the person who drops the brick or drills into the wall, or does whatever the activity is that's leading to the injury or the damage.

 If you think about it logically, they should really be the one who primarily bears responsibility. And when we talk about risk transfer, when we talk about protecting the building against liability, we're really talking about requiring that person to say, I agree to be first in line and to provide the defense for everybody who gets sued, who's involved.

Building the managing agent maybe the general contractor, if it's a subcontractor who's actually doing the work and so forth. Each one of these parties is carrying insurance, but you wanna have an agreement among the parties that says that the person who's doing the work is the one who's gonna bear the primary responsibility.

And there were really two parts to that. One is, who's gonna pay if there are damages that have to be paid? But also who's gonna bear the expense of defending everybody in court against the claims? The cost of defense can be a very significant part of the potential loss that you suffer, and so having somebody else's insurance company paying the lawyers to provide the defense, protects against spending money on that expense.

Carol Ott: So this isn't a new problem , but the cost of insurance has skyrocketed. What is the disconnect there? Why is insurance so much higher? This I assume has always been a problem. 

Howard Schechter: It has always been a problem and, but people didn't focus as much on it as a problem as they have in recent years.

The insurance companies have increasingly been looking for ways to limit their losses and to limit the risk that they're assuming the insurance business is a business of evaluating risk and assigning some sort of numerical value to it that gives them a basis for charging you a premium. Their job is to make enough money so that it covers all the risk, plus it pays them a profit.

It's become increasingly difficult over the last number of years, particularly for apartment buildings that we are talking about for the insurance companies to evaluate that risk. In part because there are laws that impose liability on a building owner that have been pursued by the plaintiff's bar as a way to increase their recoveries.

Carol Ott: Could you just explain that in plain English? 

Howard Schechter: Yeah, so for example. A big part of this has to do with workers getting injured on the job. There is a workers' compensation system that is supposed to compensate workers who are injured while they're doing their job. The good part about it is that they don't have to prove that somebody was negligent in order for them to recover.

If they get injured on the job, they're entitled to have their medical expenses paid. If they become disabled, they're entitled to disability benefits. What they're not entitled to under that system is a recovery for pain and suffering. In order to get a recovery for pain and suffering, they have to prove somebody was at fault and then go after that person to collect for that additional element of damages.

The obvious person who's supervising what's going on and providing safe equipment, monitoring to make sure that it's being used correctly and so forth, is the employer of the person who gets injured, but by law there's no pain and suffering recovery there. So what the people who've been injured have been looking for is a way to find somebody else who they can hold responsible.

And there is something in New York called the labor law, which imposes certain kinds of what's called strict liability on the owners of property, when somebody who's working on that property gets injured. And so the employee comes to the building and says, I may be limited in my recovery against my employer, but you are not my employer.

You the building have strict liability under the labor law, and therefore I'm gonna seek to recover damages from you, including my pain and suffering. And so the building has an exposure that goes beyond what the employer of the worker is exposed to. 

Carol Ott: And when did this pain and suffering dollars that the worker gets, when did this grow so much that it's now a problem in affording assurance, perhaps renewing a building's insurance policy? Was there some kind of trigger that changed something? 

Howard Schechter: It's not so much that there was a trigger, it's been a development over time. In significant part it has to do with what's called the Scaffold Law, which says that if a worker is injured based on what they call an elevation injury, basically it was designed for somebody who's climbing up a ladder and the ladder collapses or falls over , gets injured.

That is one of those strict liability claims against a building owner. The theory being, that the building owner should be monitoring whoever is doing work on their property to make sure that they're doing it safely. And if they're not, they're gonna be exposed to liability that goes beyond the workers' compensation exposure that the employer of the injured party has. 

Over time, the courts have expanded the interpretation of what constitutes an elevation injury. I would say over the last 25 years, it's grown fairly substantially, basically. Now anything that involves gravity that results in damage is considered an elevation injury, not just falling off a ladder. But something falling down and landing on the employee, falling off a step, even though it's a permanent step, something falling out of somebody's hand and landing on someone else-- that's an elevation injury.

And so the range of potential injuries that can lead to one of the Scaffold Law claims has been expanded dramatically by court interpretation of what is meant by the statute. And so the plaintiffs fought, whereas this was essentially a fairly obscure law that was relied upon in the unusual instance that the ladder fell down has been expanded to the point where whatever the injury is, there's a claim that it's an elevation injury, and you have to litigate whether gravity was involved in causing the accident. And so the number of cases that have been brought, relying on this has expanded dramatically, and the ability to predict what the outcome is going to be has gone down.

Carol Ott: Can I just ask, is part of this brought, because something has changed that either there are more cases or people are going after more money. Is there someone we can look at and say, you have really contributed to this problem? 

Howard Schechter: I don't think you can point to any one party in this because there are lots of parties who are involved. It starts with the state legislature. New York is the only state that has a law like the Scaffold Law.

And obviously it was adopted because the legislature felt that they were protecting workers against the kind of injury that shouldn't occur on a work site. They shouldn't fall off a ladder. If they're standing on a scaffold, they should have some kind of protective railing around it so that they don't fall off.

And so when you adopt a law like that, it imposes that risk on people and they say, gee, I better be careful 'cause I don't want to get sued. What has happened is that the people who represent the injured workers have looked for ways to expand the recovery for them, I don't think you can blame them for trying to do that. If somebody else is injured, if you're in a car accident and you suffer pain and suffering, you can recover the pain and suffering damages that you incur. So the fact that they are getting the availability of workers' compensation doesn't prevent them from saying, gee, I really did have pain and suffering here. I couldn't walk for a year and had to drag my leg down the street because it was injured.

I should be compensated for that. They're out there looking for a way to recover for that kind of an injury. And the courts have expanded the definition. I don't think this is what the legislature had in mind, that's my interpretation, when they started on this. And what has not happened is that the legislature hasn't gone back.

And said wait a second. This is getting a little out of hand. It's disrupting the insurance market. It's making it way more expensive for everybody who wants to do work on their building, and we should take some steps to mitigate this by reducing the range of injuries that potentially fall into this category.

There's not a big constituency for that because it's presented as you want to take something away from injured workers, which is not a particularly popular position to take. So it has a momentum of its own and all the players in it. I was just reacting to the way it's developing.

Carol Ott: So as a board of a building, what is a strategy that the board should adopt so it doesn't get left holding the potato? 

Howard Schechter: So there are increasingly requirements being placed by the insurance companies that insure the buildings so that they can protect against the possibility of these kinds of claims coming in.

And the primary factor in that is what's called risk transfer. Now people's eyes glaze over when they hear that, and. What I'm saying to boards of directors and boards of managers is you can't let your eyes glaze over. This is really something that's important and it's very fundamental.

Nobody should come into your building who's engaging in a risky activity. Construction, a moving company-- if you drop a couch, that could be an elevation injury. So what you wanna do is you wanna assure. That all of these companies are carrying insurance and are carrying adequate insurance.

Another aspect of this is that the insurance companies for all of these vendors are looking for ways to limit their exposure. So they write these policies that have exclusions. It's like a little cat and mouse game. The people who are demanding the insurance wanna make sure that there's coverage for the activity that's going on their property.

But the insurers then build these exclusions into their policies. Talk about your eyes glazing over, try to read one of these insurance policies. And the exclusion may take away the coverage that you think you're getting. That's increasingly become part of the game.

So that you can have a contractor who, yes, he's a general contractor, he's got coverage for doing brick work and he is doing brick work on your building. But you find out when you read the gory details that he doesn't have coverage if the work is above the second floor of the building. That's great, but if you have a 10 story building, that's a big problem. And when the injury occurs to somebody who's standing on a scaffold at the eighth story level, all of a sudden that insurance is not there. So part of it is assuring that the contractor has the required insurance, but there's a second part to it. And the second part is you wanna be protected by that insurance, and that doesn't automatically occur. When an insurance policy is written, the insurance company says You, Mr. Insured, if you get sued, we will provide a defense and we will provide indemnity. As long as the policy covers what it is that you're being sued about. What it doesn't say is we're gonna cover any third party. The building is a third party in that situation, so the building has to make an agreement with the contractor that says the contractor is the one who's going to be responsible.

If there is a claim that's made against the building, the contractor or the contractor's insurance company is going to provide insurance coverage, both for the defense of the claim and for the payment of the claim, if there is a payment that's required. So the primary responsibility may be found to lie with the contractor.

The contractor did something wrong. But maybe the jury says the employer is also responsible for 10% of that loss. I'm sorry, the building, not the employer. The building is also responsible for 10%. The jury, in their wisdom, have decided that's the way the negligence should be divided up. That 10% is gonna get paid by the contractor's insurance company if you have an appropriate indemnification agreement and an agreement to make the building an additional insured under the contractor's policy. 

Carol Ott: And who in this scenario assures the board that this has happened? 

Howard Schechter: So in the first instance, the managing agent should be not allowing a contractor to come into a building unless the contractor has provided proof of insurance and has signed an indemnification and insurance agreement.

This is actually something that gradually the industry is learning about, but there's a quirk in this setup. Which is that if you were my contractor and I said, give me a proof of your insurance and make me an additional insured, you could go to your insurance broker and they could fill out a certificate of insurance and that certificate of insurance could list me as an additional insured.

And I could think when you hand me that certificate of insurance that I'm protected, but probably that's not the case. The standard in these liability insurance policies is that if another party is named as an additional insured, they will be an additional insured, provided that there is a written agreement between the named insured under the insurance policy and that third party to name the third party as an additional insured, what I'm calling that indemnification and insurance agreement. 

Without that separate agreement, where the contractor has agreed to make me an additional insured, I'm not an additional insured, even though it says so on that certificate of insurance. To make matters worse, just to take it one more level, sometimes the insurance policies don't say what the usual insurance policies say, and so increasingly when you're dealing with significant jobs, the standard has become to require that the contractor go back to their carrier and ask their carrier to endorse their insurance policy and issue a specific endorsement that says, I am now an additional insured under that policy. Once that's the gold standard in this, if you have the contractor's insurance company issuing an endorsement to the contractor's insurance policy that says the building is now an additional insured, you can feel confident that you're an additional insured under their policy. It still only covers what their policy covers. And so increasingly the question becomes, what does the policy really say? And so buildings are increasingly to answer long way around, to get to the answer to your question, the buildings are demanding the actual insurance policy. And the insurance brokers and the insurance companies that provide the coverage to the buildings are increasingly providing as a service review of the insurance. And there are also third parties that will do this kind of review for a fee to determine that in fact, the work that's being done under this particular contract is covered by the insurance as set forth in the insurance policy and that the additional insurance position that you want the building to be in vis-a-vis the insurer of the contractor is in fact, in place. 

Carol Ott: So I understand the process for a building you don't have usually that many projects going on at one time. But the residents in the building have furniture delivered. They have a painter, they have a plumber, you know that increases the number of contractors walking into the building significantly, or it can significantly.

Who monitors that? 

Howard Schechter: The answer, and it's an unfortunate answer, the answer is that the alteration approval process should include the insistence that anybody walking into the building signs an insurance and indemnity agreement, provides reasonable proof of insurance and shows that the additional insured status is in fact being afforded to the building. 

That's difficult, and I'm not saying it happens in every instance, but that's what you're striving to accomplish. 

Carol Ott: And who, of the professionals that that boards work with, who checks that? 

Howard Schechter: I would say it's a combination of the managing agent and the insurance broker from whom you buy your coverage. 

Carol Ott: So suddenly the buildings insurance broker, their responsibilities toward the building, it's not just making the sale, or stepping in when there's a problem.

Their work has increased, I would assume, exponentially. 

Howard Schechter: I think it has. I think in some instances the review of the policy is actually handed off to the insurance carrier. And some of the carriers who are providing the insurance want to do this review because it gives them an opportunity to limit their risk. And to the extent that it is not available through that and that it's beyond the capability of the particular broker, the answer is third parties are starting to step in and offer this as a service. And as the risks continue to increase, and the insurance companies are rejecting claims and refusing to pay them, and non-renewing policies because there are too many claims, I think that's the direction that the industry is going. That there will be these third party vendors who will do the review and that will be part of the process of doing any kind of significant renovation.

Carol Ott: I just wanna ask you as we draw to a close, I know insurance, we're in what's called a hard market. And in a hard market for insurance, without going into a whole bunch of details, insurance is more expensive. Do you see anything in the horizon that indicates the hard market will soften? 

Howard Schechter: The answer is cyclical.

There are hard markets and then there are softer markets. And it's partially based on the insurance company balancing the amounts that they have in their coffers, the amounts that they collect in premiums, and the amount that they have to pay out in claims. When the amount they pay out claims is higher than they anticipated, the market becomes hard. They want to raise more money from premiums, they wanna limit the possible exposure, until it gets to the point where, and hopefully it gets to this point the competitive urge to get more business overcomes the desire to avoid the risk, and the premiums become more competitive.

The market gets softer as the insurance companies become flush with money that they don't have to pay out or haven't had to pay out, and can afford to take a little bit less in the premium in order to generate the business. 

Carol Ott: Alright I don't know if this has been an optimistic or a pessimistic conversation, but it's been very informative and thank you very much.

Howard Schechter: Okay, Carol, thanks.