Empire State’s skyscrapers send insurance costs sky high

New York’s outdated legislation is hindering the city’s renewal and inflating the cost of liability cover so vital to its construction industry, says AEGIS London’s Matt Yeldham.

Skyscrapers may have been born in Chicago with 1885’s Home Insurance Building but they undoubtedly came of age in New York. Between the 1880s and 1930s, a wave of high-rise construction transformed New York’s skyline while compelling construction workers to ply their trade at ever increasing altitudes. Accidents inevitably followed.

Five workers died during the building of the Empire State Building; three on the Rockefeller Centre. The authorities’ response included some of the most stringent safety laws in America including 1885’s scaffold law, which many argue is today inflating the cost of construction in the city’s five boroughs, adding as much as $10,000 to the price of a new home. Insurance is not immune either. Estimates suggest insuring a construction project in New York costs ten times more than the same project in another city.

The scaffold law – which imposes a strict liability for gravity-related accidents on property owners and general contractors – is part of the reason why New York construction is a minefield for unwary underwriters. A fistful of similarly archaic statutes on the books exacerbates the situation. But that is just one piece of the puzzle. When it comes to construction liability insurance, New York has one last joker tucked up its sleeve.

With the main and most notable exception of New York State, if a worker is injured in the course of his or her employment in the US, their principal course of remedy is workers’ compensation – a form of insurance providing wage replacement and medical benefits in exchange for mandatory relinquishment of the employee's right to sue their employer for negligence. This is a major disincentive for frivolous law suits. But in the city that never sleeps, a construction worker can have an accident, claim workers’ comp’, receive medical treatment and still sue their employer or another involved party without ever being out of pocket. In addition, workers’ compensation insurers in NY may not direct medical treatment while plaintiffs may receive treatment from any surgeon or medical practitioner they wish. Even Chicago, birthplace of the skyscraper, repealed this particular piece of legislation 20 years ago. And because it is founded on strict liability, there is no notion of comparative negligence, hence it is very hard for a defendant to mount an effective defence.

As mentioned earlier, the origins of these statues date back to an era when the concept of workers’ rights was virtually unknown. Other sectors in the US went through a similar process of legislating in order to provide a degree of protection, with similar results today. The Jones Act of 1920 increased protection for mariners with a similar strict liability regime while the Federal Employees’ Liability Act of 1908 performed a similar feat for railroad workers. Both these acts were drafted for the right reasons – to protect the oppressed and the vulnerable. Since their establishment, a wealth of health and safety legislation has come into force, as has the science of risk management, protective clothing and a multitude of safety enhancements.

Today, this legislation including New York’s construction regime, has perversely created a system in which many people feel too much money is being sucked out of society in the form of compensation. New York’s aging infrastructure is in urgent need of upgrading. Projects such as the Gateway Rail Project beneath the Hudson River and the replacement of the Tappan Zee Bridge are being delayed and having their costs inflated by insurance premiums and claims.

What makes matters worse is the unhealthy compensation culture that has developed in New York, some of it fuelled arguably by lawyers and medics who will encourage certain courses of action. For example, a spinal fusion is a surgical procedure carried out to help repair a damaged spine. It is an expensive and time-consuming operation – and creates the potential for a major compensation pay-out. Perhaps unsurprisingly, an unusually large number of New York construction workers undergo this procedure following a gravity-related accident. Some commentators have suggested that a spinal fusion may ultimately lead to a significant compensation award.

To further exacerbate matters, if a plaintiff prevails at summary judgement, pre-settlement interest mounts up at a rate of nine per cent annually.  The fusion procedure in isolation may account for up to several hundred thousand dollars in medical costs in addition to significant prior and subsequent costs of care as well as projected loss of earnings up to retirement age, which is very often 65.  The sum of all such parts may lead to very significant awards.

Amid such difficult market conditions, the number of underwriters willing to write New York construction liability business has reduced to a small pool. Many underwriters have sustained significant underwriting losses within this sector and have very often found it hard to accurately reserve adequately for the exposures incurred, given the very often subjective and unique matters involved in respect of this business. Indeed, even at the current pricing levels there is little potential for profit.

In the short-to-medium term, New York’s construction legislation is unlikely to change markedly. The ability to repeal these controversial and unique laws rest in the hands of the NY state capitol Albany-based legislators, among whom there does not appear to be sufficient impetus or desire to effect meaningful change. While many will not view this as a tragedy for the insurers writing this class, it is a real issue for the city of New York. Urban renewal on a city-wide basis is arguably being hampered. Vital transport and utility infrastructure is crumbling while the state’s legislature turns a blind eye towards the problem.

The rise of the skyscrapers may have done much to establish New York’s global reputation as the first truly modern metropolis, but it may ultimately undermine the construction industry that built them.

This article was first published in Insurance Day on 17 June 2018.