Why Contractor Insurance Policies Matter More Than Ever

Labor law insurance claims continue to threaten insurance coverage for buildings, but there are some actionable items co-op and condo boards can take to reduce this exposure. Sean Kent, senior vice president at FirstService Insurance Brokers,  explains what they are, and how a 250-unit Bronx co-op overcame an insurance crisis when labor law claims threatened their coverage. Habitat’s Emily Myers conducts the interview, and in it Kent explains the difference between admitted and excess/surplus carriers (with premium differences of 100-300%), why timing is everything during insurance renewals, and what the “new normal” costs are for insurance and umbrella liability coverage.

How To Run Your Building: For Co-ops and Condos

Transcript

Emily Myers: Welcome to Inside Track, a conversation with New York's leading property managers. I'm Emily Myers with Habitat Magazine, and my guest today is Sean Kent, senior vice president at First Service Insurance Brokers, the insurance branch of First Service Financial. Today's tough insurance market means co-ops and condos are seeing higher deductibles, higher premiums, lower coverage limits, and more exclusions. This also means some buildings that used to get great coverage at a good price no longer qualify and their premiums are skyrocketing. Sean, you recently handled this situation at a 250 unit building in the Bronx. We'll talk about some of the practical solutions in a bit, but can you first share what happened?

Sean Kent: Sure. So, a co-op in the Bronx undergoing a major project a few years ago. There were a couple labor law claims that stemmed from that project, whereby some workers for the contractors doing the work were injured on the job site and had a claim against the contractor and the building owner.

And as we know, labor Law 240 there's no need to prove negligence in those cases. They became a, a difficult hurdle for the board and the co-op to overcome when it came time to renew their insurance. 

Emily Myers: Yes. So you touched on New York's unique Scaffold Law where liability is on property owners for injuries suffered by workers in falls, and it's contentious because on one hand it protects workers' rights and safety and on the other, it drives up construction costs and insurance premiums.

Sean Kent: So what was the result for this building? 

These two claims remained open for some time which is often the case with labor law claims until the discovery period runs its course. We're able to either tender the claim back to the contractors or not. And in many cases, depending on the protocols that a property manager or a board may have in place, when it comes to contractual risk transfer, reviewing the insurance contractors' insurance policies in place, I would say it's 50 50 whether or not those claims get tendered back to the contractor. In this particular instance because of the fact that the property manager for FirstService Residential followed our standard operating procedures, which include all the above that I just mentioned, contractual risk transfer, making sure there's indemnification and hold harmless language in place for the contracts.

Sean Kent: Reviewing the insurance policies for the contractor that was doing the work to make sure that there's no exclusions and they had adequate coverage. We ultimately were able to tender those claims back to the contractor, which worked out to be very favorable for the co-op and the board when it came time to renew insurance.

Emily Myers: But as I understand it, with these claims tended, whereby the liability is transferred to another party, there is still a risk that perhaps the original carrier might not take on the building. 

Sean Kent: Correct. So that is what happened here, Emily. And as you stated the insurance marketplace for New York City condo co-op in particular is very challenging right now.

In many cases, even when those claims can be tendered back, there's still an expense related to that for the insurance carriers that are involved. And many times underwriters might be looking for just little things to get off of a risk if they feel that particular building or that risk doesn't suit their appetite.

So in this particular case, it was an admitted insurance carrier, so a very well known and reputable insurance carrier that specializes in New York City condo co-op insurance. They were insuring the building for a number of years, and then when these claims first happened, they actually did renew the policy for another year.

But those claims remained open until the claims were tendered back and ultimately closed. Ultimately they did decide to non-renew coverage. And in these situations, Emily, it can really go awry pretty quickly where if the broker's not doing a good job to access the right insurance carriers and underwriters that might be interested in underwriting that building they may be forced in the excess and surplus marketplace, which is often the case when, number one, there's open claims of any kind.

Liability claims, that is. And number two, those open claims are associated with labor law claims, right? In this particular case, the insurance carrier did decide to non-renew. However, the insurance broker did a great job of accessing all of the major players in the admitted marketplace that really specialize in condo co-op.

And were able to replace coverage with light coverage at a similar rate that they were paying prior to the non-renewal. Again, that all goes back to the ability to tender the claim back to the contractors and get those claims closed with relatively no payout or exposure to the board.

Emily Myers: You just mentioned admitted and excess and surplus, and I just want to make sure that our listeners understand these terms admitted and perhaps non-admitted. These are basically preferred versus not preferred, as I understand it. 

Sean Kent: Correct. Yeah. An admitted insurance carrier is backed by a state fund that essentially would pay for future claims should that insurance carrier become insolvent.

So it happens rarely, but it does happen, right? And even with some large carriers, not too long ago without mentioning names, where those carriers did have some financial issues. Non-admitted carriers, non-preferred carriers they do play a purpose in our marketplace, right?

They have more flexibility to underwrite difficult risks. Now unfortunately they often do come with certain exclusions and restrictions and much higher premiums. So because of labor law and because of the unique nature of labor law in New York, many times condos and co-ops are being forced in the excess and surplus marketplace when there's otherwise no coverage available in the admitted marketplace.

And, many cases that those premium increases can be anywhere from a hundred to 300%. So it's really important for boards and property managers to know the drill when it comes to transferring that risk and making sure that we're crossing our t's, dotting our i's, and doing everything before the work takes place. . 

Emily Myers: So this building obviously found a preferred carrier. . But they were still denied coverage with their original, preferred carrier. So that must have been a very anxious time for the board. 

Sean Kent: Yes. Good point. And nothing really goes smoothly in these situations because it's all hands on deck to make sure that all parties are working together, the board, the property manager, the broker, to present this risk, this building in a favorable light in the insurance marketplace and get underwriters interested in rewriting the risk and taking it over as new business to them. So yeah it's really important to keep things in motion. Underwriters for insurance carriers they are inundated right now because of ,the state of the marketplace, especially admitted carriers.

So they're often quick to decline a risk just because I. they have so much on their plate as it is. But when they are interested in that risk and they think it may be a good risk for their company they take their time to do their due diligence, which often means those quotes come down to the last minute.

So I would say one of the biggest complaints that we have, and if there's one thing that we could change with the current state of the marketplace, is just the timing of everything with insurance quoting and renewals. Boards are just becoming so frustrated with the timing of everything. And in this case, there was a favorable outcome, but in many cases there isn't. Right? Because brokers are really using all of the time available to them before their current policy expires to continue negotiating in the marketplace with the optimism that they're gonna find a really good renewal quote with an admitted carrier.

But sometimes that doesn't happen. And sometimes it goes to the excess and surplus marketplace with the premium increases that we just mentioned, and sometimes with exclusions on top of that. So really anxious times for boards that are going through those situations when a policy's being non-renewed.

Emily Myers: And for this building, if the property manager and board hadn't followed the steps to establish the contractor's insurance coverage, this outcome would've not have been possible. It really illustrates the importance of making the contractor's coverage watertight. 

Sean Kent: It does. Yeah, it does. 

Emily Myers: This also is a good reminder that the certificate of insurance isn't enough to confirm coverage. You really need to take that additional step to look up the policy. 

Sean Kent: Yeah, exactly. A certificate of insurance is only as good as the day it was issued. Especially for contractors.

'Cause keep in mind, the state of the marketplace for New York is not immune to other industries outside of condo co-ops, right? So contractors in particular are really feeling the pinch, depending on who they have representing them in the marketplace.

And there are brokers that specialize in construction. There are brokers that specialize in habitational , condo, co-op space apartments. Maybe they don't have a broker that truly understands the nature of their risk, and they may even have exclusions on their policy.

Because, a contractor is looking to essentially, reduce their expenses like we all are. So a great example of that is, in one of the insurance contractors' policies that we were reviewing, they were a roofer doing a major project on a building, and there was a height exclusion on their insurance policy. Which essentially means, anything over 35 feet, which is about three stories, is excluded. So that's a good example of the devil's in the detail. You have to take a look at the insurance policies and have somebody that really knows what they're doing, reviewing those policies to make sure that everything is in order and coverage would be transferred in the event of a claim.

Emily Myers: That's a really good practical solution. Boards need to be absolutely vigilant when it comes to insurance coverage for building infrastructure projects. Is preventative maintenance another takeaway from this ? 

Sean Kent: Yes. There is a lot of discussion in our industry right now around preventative maintenance.

There have been claims that have turned into significant payouts, significant settlements that could be deemed preventative maintenance when you look at the details of the claim, right? A painter comes in to do some work, but has to get on a ladder, falls off the ladder and has a claim against the board, right?

So typically preventative maintenance should not be privy to Labor Law 240, typically. In most cases, I think the courts would rule that way, but there are certain claims that have taken place where it's a gray area. I think generally speaking though, boards, property managers are really becoming much more educated on this topic and much more sophisticated, just because of, interviews like this and the publicity around what's going on in New York.

So we really have found that there's been a major shift over the last year and a half where boards are starting to get it . Where they're going to bid for a major contract or even a smaller contract, and they may have one that is much lower in cost than the other two.

But they're looking at , once we get our hands on the contractor's insurance and oftentimes there's some negotiating during that process, right? So when a board says, Hey, we really wanna work with this contractor. We like them, but their insurance doesn't necessarily meet our standards, we will work with those contractors to try to get the exclusions removed or try to increase their limits on their umbrella liability policies.

But again that correlates directly to the cost of the project. Because that's gonna be baked into the bidding cost for the contractor. It's an interesting exercise, but I do think that boards have become much more sophisticated and are beginning to understand that it is a real risk to them if they don't do what it takes to transfer those risks.

Emily Myers: And are there any other takeaways that the board to, for boards in order to keep their insurance premiums down? 

Sean Kent: Liability claims in particular in New York slip, fall claims are a big issue. Especially when you have large buildings that take up an entire block or large communities that take up an entire block. So they may be responsible for four corners of sidewalk. So underwriters are looking closely at those kinds of things.

They have inspectors that go out to look at the building and make sure everything is in order and they're underwriting the risk as it's been presented to them. And they may have recommendations. They call them recommendations when in fact, they're requirements, right? They're saying you need to do this if you wanna stay insured with us, and in some cases it's repairing the sidewalk or painting parts of the sidewalk where it may present a slip fall or something like that. It may be just taking a look at the reserve study and seeing how the building has been maintained over the years and if there's been a lot of deferred maintenance.

That's usually an indication that there could be a problem. If there's a water riser that, that may pop or electrical and plumbing hasn't been replaced or renovated in recent years. And especially in New York. Where the buildings are older and and it can be costly to do those projects.

So underwriters are certainly asking a lot more questions around those types of things. But I would say they're looking more closely at the liability piece of things because that's where they're really getting hurt and because we're seeing more frequency of claims and severity of claims.

Just larger payoffs. So yeah, preventative maintenance has become a big deal for boards and they have to budget for it accordingly too. 'cause sometimes these projects are costly, but they understand that in order to keep their insurance premiums at a moderate level, that they need to stay up with those things.

Emily Myers: So what does the insurance landscape look like then for co-ops and condos in the near term? Is there light at the end of the tunnel? 

Sean Kent: Little bit. I think there is the property casualty insurance industry in general is showing some promising trends. So if you look at it on a macro level the market in many industries is beginning to soften.

Over the last four quarters we've seen premium increases level off and in some cases reduce. So that's a good sign. And I think reinsurance carriers last year in 2023 really hit the reset button where they said, we can't continue to lose money. So we need to issue significant rate increases to the insurance companies that they are reinsuring.

Many of the studies that we saw noted that reinsurance carriers issued about 40% rate increases. So that was passed down to the consumer, whoever that may be. Even homeowners are feeling it now with their homeowner's insurance, but particularly for larger value buildings like we have with condos and co-ops. There was a little bit of a reset last year, and I think, in general, the professionals in our industry think that we're heading in the right direction. Now, again, New York City Labor Law two 40 is still a thing.

And that's really a large driver for some of these increases in some of the reluctance for insurance carriers to dip their toe back into the condo co-op space, because they're just reluctant to insure a building if they think that they could potentially be on the hook for one of these large and nuclear verdicts. If a condor co-op has a history of those kinds of claims or slip fall claims, they're still very reluctant. So I think in the near term, over the next 12 to 18 months we will probably see a light softening in the insurance market for condo co-ops. I think we really would love to see that, especially in the umbrella liability market space, because a lot of what we call risk purchasing groups who specialize in underwriting umbrella policies for condo co-ops. They were offering coverage at really low costs. The premiums were very competitive. Many of those RPGs have left the market space, but we're already seeing some players generate a little bit more interest and a little bit more openness to underwriting risks that two years ago they wouldn't.

Long term I think there's a new normal. I think there is a new norm on what insurance premiums will be moving forward and what those standard rates are. So that's gonna be a new norm. But I think there will be a leveling off in about 12 to 18 months and we should see that relatively soon.

The goal always though, for any of the brokers that specialize in our space, is to keep a client in the admitted marketplace. And we're starting to see some cases where, maybe they had a number of claims on their claims record two, three years ago; they're forced in the excess and surplus marketplace.

Maybe there are a lot of violations on the building. Those violations were closed, the claims were closed, and then we can get them back into the admitted marketplace. So we're seeing a fair amount of that. But even in those cases, the board is opting for say, lower umbrella liability limits because the higher umbrella liability limits of 50 million to a hundred million that were pretty commonplace three to five years ago, are not so much anymore. So boards are opting to buy lower umbrella liability limits. Usually it's still an increased cost. But looking at their overall risk appetite and saying, okay, we think we can live with $10 million of umbrella liability limit as opposed to 50 million, and we're still paying for it, but that's the risk we're gonna take because it's just not in their interest to spend so much money for a $50 million policy. 

Emily Myers: Great. Sean, that's tons of information there. Thank you so much. Sean Kent, senior vice president at First Service Insurance Brokers. 

Sean Kent: Thank you Emily.