How to resolve the Labor Law Sec. 240 issue: An insurance problem requires an insurance-based solution

Labor Law Sec. 240 requires building owners and general contractors to provide workers with proper scaffolds, hoists, harnesses, and other appropriate worksite safety equipment. If a worker is injured because the owner or contractor failed to meet the mandated safety standards, the owner or contractor can be held fully liable. The Scaffold Law applies only to work at elevated heights.

Labor Law Sec. 240 provides a crucial protection for construction workers. Thanks in large part to Labor Law 240, year after year New York has had virtually the lowest construction industry occupational injury rate in the nation as reported by the U.S. Bureau of Labor Statistics.

Some small contractors and homebuilders are now reporting that they are unable to obtain affordable liability insurance coverage, and they claim that this is because of the cost of Labor Law 240 lawsuits. There is a grand assumption that if Labor Law 240 is repealed or modified it will lead to insurance savings. But no one has presented any evidence to establish such a connection.

Labor Law Sec. 240 is over 100 years old and, in current form, over 50 years old. Any problems it created with insurance availability and affordability would have become apparent decades ago. In large measure, the insurance difficulties now being reported can be attributed to the insurance cycle.

Sec. 240 of the Labor Law is not the cause of contractors' insurance "crisis."

It is well known that the insurance cycle is the major factor in causing premiums to escalate, independent of any effect Labor Law 240 may have on costs.

An explanation is in order.

The insurance industry relies on investment income as its main source of its profits. When interest yields are high and the stock market is doing well, insurance company investments produce a high rate of return. Insurers take on greater risk and reduce prices to attract more capital to invest. But when interest rates are low, the industry raises premiums to protect profits.

So when interest rates were in the double digits during the 1980s, insurers slashed premiums and lowered their underwriting standards. High investment income made even riskier insureds desirable. By the mid-1980s investment income fell and the industry's aggressive price-cutting and poor underwriting came back to haunt it. In 1986, Maurice Greenberg �then and still chairs insurance giant AIG � told Business Week that the industry's problems were due to price cuts taken "to the point of absurdity" in the early 1980s and had it not been for these cuts, there would not be "all this hullabaloo about the tort system."

As investment returns recovered during the 1990s, the insurance "crisis" evaporated. Later in the decade insurers realized huge returns in the "bubble economy." Phenomenal investment results once again enabled insurers to slash premiums and take on riskier exposures. Price competition was cutthroat.

Investment returns fell sharply in 2001 and 2002 and today we are again being told there's a "crisis." During the first half of 2002, property and casualty insurers experienced what one trade publication called a "staggering" $6.6 billion decline in investment gains compared to the first half of 2001. To compensate, insurers raised premiums.

Premiums are also going up in response to the unbridled price competition of the late 1990s. In written testimony before an Insurance Department hearing on rising contractors' liability insurance costs last year, the General Building Contractors Association told the real story when they blamed the increases on the insurance industry's irresponsible price-cutting:

"In their rush for market share and the desire to generate premiums to invest in other places, especially in the rising stock market of the 1990s, some [insurers] abandoned good underwriting across the board and charged discounted prices that they now seek to recover rapidly, thus the serious hike in premiums."

The two attached Wall Street Journal articles document and summarize how insurance companies' own behavior has caused premiums to skyrocket. (You can read the full text of these articles by downloading the PDFs at the bottom of this page.) According to one of the articles:

"The higher premiums many small and midsize businesses hundreds of miles from New York City now face are the legacy of a decade of imprudence among insurers � a period that combined a relentless price war with aggressive risk-taking."

A solution that cuts costs and premiums now

Even if repealing Labor Law 240 led to cost "savings," there is no reason to believe that the "savings" would be passed on to small contractors and homebuilders. Since the insurance industry is in business to make as much profit as possible, it would be counter to their entire purpose to pass along any such "savings." And if some "savings" materialized and the insurance companies charitably passed them along, it would take years to trickle down to the small contractors and homebuilders who claim to be on the verge of closing up shop because of Labor Law 240's costs. Many of these small contractors and homebuilders say they need relief now if they are going to stay in business.

We propose a private insurance-based solution that would immediately address their concerns. This solution would provide small contractors and homebuilders with affordable and comprehensive liability insurance in the near future -- an immediate solution for what they claim is an immediate problem.

The solution calls for statutorily creating a hybrid reciprocal insurance company for small contractors and homebuilders. The company would write a single "wrap-around" insurance policy for each job site. The legislation authorizing the creation of this reciprocal would limit projects to a certain dollar amount -- $10 million would likely be appropriate -- to focus the availability of the insurance package on smaller projects, which is where the need has been expressed.

The reciprocal insurance company approach would greatly reduce costs and make insurance coverage much more affordable because:

� The company would hire site safety professionals to periodically inspect worksites.

Large contractors make extensive use of site safety professionals. Major construction sites are safer because site safety professionals hold regular worker safety meetings, conduct comprehensive training, and patrol construction sites to make sure that safety rules and procedures are being observed. Many small contractors and homebuilders do not utilize safety professionals because their cost is prohibitive. Their absence has resulted in worksites that lack even the most basic protections.

Simply put, mandatory risk management would dramatically improve compliance with safety standards. Small contractors and homebuilders would have the same loss prevention tools utilized so effectively by larger firms. That, in turn, would prevent accidents from occurring and keep loss ratios down.

� Injuries would be further prevented through experience rating. Contractors who comply with safety standards and who have relatively few worker injuries would pay a smaller premium than those who have numerous violations.

� The reciprocal would be exempt from state and local taxes and it would be not-for-profit.

� There would be a reduction in producer commissions.

� The utilization of "wrap-around" policies -- an insurance vehicle in which each project has a single policy that covers all contractors and subcontractors � would reduce litigation costs dramatically. In the event of a loss, the need for multiple defense lawyers to ascertain the contractor(s) at fault would be eliminated. In cases where "wrap-around" policies exist, one law firm can represent all of the defendants who are all part of the same insurance risk.

� "Wrap-around" policies also avoid the common practice of insurance companies attempting to escape payment by denying coverage based on a variety of common disclaimer techniques such as "late notice," "violation of exclusions," (e.g. roofing), "duplicative coverage" or other conflicts between the myriad, diverse, separate insurance policies at sites not covered by "wrap-around" policies

� Because coverage would be pooled, liability risk would be spread out over hundreds, perhaps thousands of contractors. That, in turn, would result in lowering the cost to all. Insurance would become available for all responsible contractors.

The reciprocal company would be funded initially by a government loan or guarantee that would provide sufficient startup capital so that it can begin to offer insurance policies and collect premiums. There are a number of examples of successful reciprocal insurance companies in New York, including the Academic Professionals Insurance Organization, the National Fire and Indemnity Exchange, the Truck Insurance Exchange, the United Services Automobile Association, and the Auto Club Insurance Association.

The structure of the reciprocal company would be similar to the State Insurance Fund. However, we do not suggest using the SIF as a vehicle because the Senate has expressed opposition to expanding the SIF's obligations and it is possible to start this program much faster through a totally private vehicle. The insurers, builders and contractors say they need relief right now.

In sum, the reciprocal approach provides enormous cost savings through economies of scale, ending the inefficient purchase of individual policies by contractors, reducing the numbers of worker injuries, and slashing legal costs. It would ensure that construction workers who work at elevated heights and who are injured because of the lack of appropriate safety equipment continue to receive the compensation they need and deserve while small homebuilders and contractors have available affordable and comprehensive long-term coverage.

The high costs of Labor Law 240 repeal

Labor Law 240 repeal would result in more worker injuries and deaths. By making owners and general contractors responsible for worksite safety, and making this responsibility non-delegable, Labor Law 240 effectively ensures that they select only subcontractors who adequately budget for safety and who have excellent safety records. Without Labor Law 240, this incentive would be gone.

Repeal would have a number of additional adverse consequences that may not be readily apparent.

� Additionally burden the workers compensation system. Repeal would place a greater burden on the workers compensation system if third-party rights to achieve compensation within the tort system are diminished or curtailed. When there is a third-party recovery, the workers compensation lien is repaid, so it is more efficient to provide insurance coverage than to undermine third-party rights, and it places the burden where it belongs � on the shoulders of owners and builders who are profiting from the work.

� Harm the economy. Construction workers are often younger individuals with families. Loss of these individuals from the workforce because of injury or death would be harmful to our economy. Tax revenue from their employment would be lost and a new health care system, including Medicaid in some instances, would bear the added burden of significant, long-term medical expenses.

Construction work is inherently dangerous. In high elevation work, particularly when working on a scaffold, ladder or roof, a moment's lapse in attention can result in death or serious injury unless workers are supplied with adequate safety equipment.

Without Labor Law 240, building owners and contractors in the highly competitive construction industry will cut corners on safety and more workers will become victims of avoidable construction falls. The owner who signs the construction contract and makes the payment can and should insist on � and budget for � full compliance with all safety standards.