Insurance, Construction, and the Federal Terrorism Reinsurance Program
This is part two of a two-part series wherein EisnerAmper and Philip Glick, Senior Vice President at Conner Strong & Buckelew Companies discuss current insurance issues and their impact on the real estate and construction industries. For part one, please click here.
EA: What are some of the trends in construction liability in NYC?
PG: Over the last 4 years, liability insurance premiums for construction work in the 5 counties rose substantially because of a general tightening of the insurance marketplace and, more specifically, the cost of liability claims in NYC. This has been largely impacted by the law in NYC that imposes almost absolute liability on a building owner/developer for claims arising out of injuries to employees on construction sites injured in falls (essentially a type of scaffolding act under sections 240 and 241 of the NY Labor Codes.) These Labor Codes create an extreme liability exposure to a general contractor for claims arising out of falls by the employees of subcontractors on their jobs. As a result of these factors, liability rates from general contractors continue to run 4 to 5 times higher in NY than those for similar construction work in other cities like Philadelphia, DC and Boston. Liability premiums for developers are running almost twice as high as those in other cities. These premiums remain high and, in fact, actually increased again in the last year.
One possible way to mitigate these high liability premiums is to place the liability insurance on development in NYC under project liability insurance policies. This can include combining the primary general liability and umbrella liability coverages for the project owner/developer and the general contractor under a combined policy per building, eliminating the second set of policies. This combined coverage can also automatically include a so called “tail” or extended completed operations endorsement for potential late discovered construction defect claims that could arise in the future after the construction work is finished.
A further version of this project-specific liability coverage could be a so-called ‘wrap-up insurance policy’ where the coverage for all parties on a construction project are combined including not just the owner and general contractor, but also all the subcontractors working on the job.
EA: What may happen with the Federal Terrorism Reinsurance Program?
PG: The current Federal Terrorism Reinsurance Program (TRIA) is set to expire on December 31, 2014. This has created some concern to building owners in NYC, but even more so for lenders on their properties.
Although it is likely that Congress may extend this program again (in fact a bill for a temporary extension has just been introduced), the pending expiration should make property owners and lenders consider alternatives if it is not extended. Even if it is renewed, we also feel that property owners should consider purchasing standalone commercial terrorism insurance. In some cases, the standalone commercial terrorism coverage could be less expensive than TRIA.
The private insurance option has been available for a number of years. Almost a dozen major U.S. and London-based insurers offer this coverage and in excess of a billion dollars of loss coverage is readily available. Under the current TRIA program, coverage is only available if there is a major terrorism loss including damage of at least $5,000,000 to a specific owner’s property, $100,000,000 in total damage to multiple building owners, and the event is specifically declared as a TRIA-covered loss by the federal government. Accordingly, there could be a terrorist act committed, but where no payment could be available to a property owner for its damage if the three conditions mentioned above are not met.
In contrast, the commercial terrorism insurance market has its own much broader definition of a covered loss, own separate (oftentimes less expensive) premium rates, and can offer lower limits of coverage and lower or no deductibles vs. TRIA, where the deductibles and limits of coverage purchased must be the same as that for the all-risk including fire insurance coverage limits purchased.