Labor Law Sec. 240 Q & A

Q. Would Labor Law 240 repeal lead to cost savings?



A. There is no reason to believe the repeal of 240 would lower insurance premiums. There is no data that correlates Labor Law 240 lawsuit costs with high insurance premiums. An internal memo analyzing Labor Law 240 loss experience prepared by the American Insurance Association concludes that it is impossible to segregate Labor Law 240 losses from other losses.



It is well known that the insurance cycle is the major factor in the escalation of premiums, independent of any effect Labor Law 240 may have on costs. Insurance companies rely on investment income for their profits. When investment returns are poor, as they were during the mid-1980's and in 2001 and 2002, insurers raise premiums to compensate. When returns are doing well, as during the "bubble economy" of the late 1990s, they lower their underwriting standards and reduce premiums in order to attract more business and more capital to invest at high rates.



In written testimony before an Insurance Department hearing on the issue of contractors' liability insurance costs last year, the General Building Contractors Association correctly attributed high premiums to the effects of the insurance cycle:



"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."



And at the same hearing, the National Association of Independent Insurers (NAII) noted:



"General liability insurance premiums dropped significantly over the past decade. In fact, it was not unusual for a company to pay its insurer less than half the rate of the late 1980s and early 1990s."



Q. What would happen to construction workers if Labor Law 240 were repealed?



A. By making owners and general contractors responsible for worksite safety, and making this responsibility non-delegable, Labor Law 240 effectively ensures that owners and general contractors will select only subcontractors who adequately budget for safety and who have excellent safety records. Without Labor Law 240, this incentive would be lost and competitive pressures would encourage the hiring of sub-contractors with poorer safety records. More construction workers would be injured and killed.



There are also hidden costs to Labor Law 240 repeal. The costs of taking care of the additional injured workers would be transferred to health insurers and government programs such as Medicaid would in some instances have to assume the enormous cost of long-term care.



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.



Q. Why is New York the only state with a law like Labor Law 240?



New York should be proud of its record. Labor Law 240 works. According to U.S. Bureau of Labor data, New York State's annual construction injury rates from 1999 to 2001 averaged the second lowest in the nation.



Scaffold Law repeal is an experiment that failed before. In 1962, the Legislature changed the Scaffold Law to make owners and contractors immune from liability for injuries unless they supervised or exercised some control over the work site. As soon as this change was made, owners and contractors began to insulate themselves from liability for injuries caused by dangerous conditions on the job site. They delegated to sub-contractors while contractors and owners looked the other way. So in 1969, the Legislature restored the pre-1962 law.



Q. Why are small contractors and homebuilders having trouble obtaining affordable insurance?



A. First, their financial capacity and ability to pay premiums is limited. Second, their safety records could use improvement. Large contractors utilize site safety professionals who conduct trainings and patrol worksites to make sure safety rules are being followed. Small contractors often lack effective risk management and the absence of site safety professionals results in some of their worksites lacking even the most basic protections. Insurers therefore avoid writing small contractor and homebuilder risks or provide sky-high quotes.



Q. I heard that property/casualty insurers aren't doing so well – many of them lost money in 2001 – so they have no choice but to raise contractor's premiums.



A. The property/casualty insurance industry earned $29 billion in 2003, the most the industry has earned since at least 1995 except for the bubble-economy years of 1998 and 1997 when extraordinary investment gains swelled insurers' income.



Q. Why do you think your insurance solution will work?



Because it provides for risk management, because the reciprocal company would be non-profit and tax-exempt, because it would utilize wrap-around insurance policies that would dramatically reduce legal costs and realize administrative efficiencies.



Q. I hear the contractors are forming their own reciprocal. Why not go with theirs?



A. The contractors are on the right track in forming a reciprocal. But it has major shortcomings:



• Their reciprocal lacks mandatory risk management. The market as it is presently constituted is not attractive to insurance companies because of the poor safety practices of small contractors and homebuilders. There is no reason to believe that a reciprocal that does nothing more than concentrate poor risk without changing the behavior of these contractors and homebuilders will work. Indeed, by concentrating all these poor risks, it is doomed to failure.



The only way that a reciprocal has a chance of succeeding in this segment of the market is to change behavior and improve safety dramatically, which in turn will keep their loss experience down.



• Contractors and small homebuilders lack sufficient capital to "kick in" to start a reciprocal. Government is needed to "kick start" a reciprocal. Our experts have calculated that for our reciprocal, a government contribution of only $2 million and a loan guarantee of $18 million would be sufficient start-up capital. All monies are repayable to the government after the reciprocal is capable of standing on its own feet. To help do so, certain tax-exempt status is afforded.



• Their reciprocal does not experience-rate rate based on compliance with safety regulations. They wait for accidents to happen first, which is the whole problem to begin with.



• The announcement of their reciprocal did not say that it would utilize "wrap-around" policies. The annexed document, "How to Resolve the Labor Law 240 Issue," sets forth the substantial advantages in reducing litigation costs of "wrap around" policies.



Q. Why can't you just have the State Insurance Fund do it?



A. The last time the SIF was proposed as the vehicle for an insurance solution, the Senate rejected it. The Senate has not shown that it is inclined to increase the size of this quasi-governmental entity.