STATE OF THE NY CONSTRUCTION MARKET

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To date there is has been no notable progress on the effort to amend Labor Law 240 to eliminate the “absolute liability” interpretation. The impacts continue to be far reaching, extending beyond the Five Boroughs and surrounding areas to the outer NY counties. The effects have drawn enough attention to affect discussions on Federal Infrastructure funding. Such attention has resulted in debates of House Resolution H.R.3808 – The Infrastructure Expansion Act of 2017. The Summary of the Act, as described by Congress is as follows: “This bill precludes absolute liability in any action against a property owner or contractor for projects that are federally owned or operated or are receiving federal financial assistance for infrastructure and transportation development for any injury associated with an elevation- or gravity-related risk occurring on those projects. In any such claim, a state shall apply a liability standard that considers the comparative negligence of the injured person, when such negligence is a proximate cause of an injury.” Despite being introduced in the House on 9/21/2017, it was Ordered to be Reported (Amended) on 1/30/2018, which is where it stopped.

Unfortunately, the news is not only stagnant, there is a deterioration in the situation as well. Settlements and awards are increasing. While a typical Labor Law Settlement used to average $3.3M, we are now observing trends of Plaintiffs holding out for closer to $5M with demands as high as $14M.

One of the largest insurers of NY contractors was recently ordered by it’s Headquarters to immediately move all NY contractors to deductibles of at least $1M or face non-renewal. Since many NY Contractors are unwilling or unable to retain such a high deductible, the result will be a mass-exodus of Contractors from their previously safe haven insurance company. This virtual exit leaves only two “top-tier” insurers left in the market. Both carriers are already feeling the effects of trying to fill the hole. They cannot staff up fast enough, nor do they intend to take every account. The accounts they decline will flood the “second-tier” and E&S markets with possibly more submissions than they can handle. Possibly the most severe impact of this move stems from the fact that the departing carrier relied less on reinsurance than their competitors.

As some may already be aware, most insurance companies are dependent on reinsurance. If an insurance company provides $2M of insurance, they are usually not at risk for $2M. They pay another insurance company to share in the risk. Since insurance companies have capital requirements, retaining the necessary capital to insure 100% of all policies on their own with no risk transfer is impossible for all but the largest insurers. Reinsurance companies are few and their Reinsurance Treaties often address multiple lines of coverage and classes of business. Recently reinsurers have been hit, not only by NY Labor Law losses, but natural disasters as well. In order to maintain their capital requirements many reinsurers have scaled back. Now that their cost of capital is higher and profits are lower due to losses, they are charging higher rates for the reinsurance they provide. The increased cost of reinsurance, out of necessity, forces insurance companies to raise their rates to cover the additional expense.

With the increase in the reinsurance costs, and most remaining carriers still willing to entertain NY contractors being dependent on reinsurance, GL rates are increasing at least 25% for Guaranteed Cost buyers. Loss Sensitive buyers are not immune from the effects of the reinsurance market, but as the insureds share risk with the carrier in addition to the reinsurers, the impact is lessened.

When the effects of the LL240 boom were first being truly understood, we felt one of the worst markets for construction when the ability to find the first layer of excess above General Liability became next to impossible. The argument was, with the average settlement exceeding a two-million-dollar GL policy, the first layer of Excess became a “working layer” which that market was not prepared nor priced to handle. The market eventually adjusted making the first $2M - $5M in excess available, just much more expensive. Some carriers were willing to offer just the first $3M allowing the higher excess to be purchased cheaper. Unfortunately, now that settlements are on the rise and no relief in sight, and the availability of reinsurance shrinking and becoming more expensive even at this level, Excess Liability costs are increasing between 25% and 100%.

Unfortunately, “class underwriting” of NY contractors seems to always yield the same result… insurance carriers need to keep driving up premiums or they will exit the market, either willingly or not.  Until legislative reform becomes feasible, the only solution is for individual insureds to get control of their own costs, apart from the performance of everyone else, which also means taking ownership of additional risk. At RBA our goal is to help our clients identify the likely and worst-case scenario in assuming risk. We strive to work side-by-side with our contractors to maximize risk-reward by choosing the appropriate program structure, identifying sources of additional cost, and facilitating partnership between them, us and the insurance company to secure the best possible outcome for both the short, and long-term.

Unfortunately, “class underwriting” of NY contractors seems to always yield the same result… insurance carriers need to keep driving up premiums or they will exit the market, either willingly or not.  Until legislative reform becomes feasible, the only solution is for individual insureds to get control of their own costs, apart from the performance of everyone else, which also means taking ownership of additional risk. At RBA our goal is to help our clients identify the likely and worst-case scenario in assuming risk. We strive to work side-by-side with our contractors to maximize risk-reward by choosing the appropriate program structure, identifying sources of additional cost, and facilitating partnership between them, us and the insurance company to secure the best possible outcome for both the short, and long-term.