If you are a contractor in the State of New York please give this a read. Understanding what to look for to make sure that you are covered correctly for specific gaps in coverage can be the difference between being a thriving business and going bankrupt!
Workers Compensation Insurance was created to protect employers from getting sued by their employees and to provide coverage to employees for medical and compensation of wages while they cannot work in the event of an on the job accident. New York was the first state to pass a workers compensation law and the coverage is now required in all states. Prior to the Workers Comp mandate, the state of New York was a progressive state with regards to protecting employees and employers in the event of work accidents and they had implemented state labor Laws in the late 1800’s to do just that. These laws, New York State Labor Laws 200, 240(1), and 241(6) are a group of laws that were put in place to create a safe work environment for construction and heavy trade workers at the time when the only way to get paid for being injured on the job was by suing one’s employer. Now that workers compensation exists, and is a federal requirement, these laws serve little purpose but for whatever reason have not been altered or removed. Roughly 30 years ago an attorney found that these laws could be exploited to produce large settlements (much of the time in the six-to-seven figure range) for their clients through the loop-holes created by leaving these laws on the books and transferring absolute liability to the project owners, general contractors and trade contractors that subcontracts work.
If you are an owner, general contractor or a trade contractor that subcontracts work out to others then there are certain parameters that you need to have in place in order to protect yourself from being vulnerable to these litigations. The below is a brief layout of those parameters:
- Make sure you do not have a “Third-Party-Action-Over” ,“Action-Over”, “Independent Contractor” exclusion on your policy.
- Third-party-action-over claims are exactly those situations where an injured employee, after filing a worker’s compensation claim and collecting benefits, sues a third party such as the owner or general contractor for unsafe workplace under the NY labor laws. Typically, the liability would be passed back to the employer because of a previous indemnification agreement (referred to as a “hold-harmless agreement”).
- Always require a signed Hold-harmless Agreement be in place when hiring subcontractors as a GC or trade contractor (or when hiring a GC if you are an owner).
- Having a lawyer-approved agreement in place will help to assure that liability cannot be placed on you for an injury to an employee of your hired subcontractors. Without this agreement, an injured subcontractor can sue a general contractor for damages without the liability being placed back on the employer. This agreement will place the liability back on the subcontractor in the event of such a claim.
- Always verify that the subcontractors you are hiring have sufficient insurance coverage in place before allowing them on a job-site and that their policy covers Labor Law claims.
- This is something you should do under every circumstance. It is very common for subcontractors to obtain certificates of insurance in order to provide their GC proof of coverage to start a job, and then cancel their coverage soon after to avoid paying higher premiums. If your subcontractor has no coverage, and there is a claim, then that claim will be put through your insurance policy, and your insurance rates can potentially skyrocket and continue to remain high for up to 5 Years and could prevent you from getting coverage at all.
- There are specific forms and endorsements to look for on your policy that make this precaution even more important:
If your insurance policy has, what is referred to in the insurance industry as, a “hammer clause” attached to it, this becomes vital.
- A “Soft hammer” basically states that if your subcontractor is uninsured, or if their insurance coverage is insufficient, the insurance company will either impose a deductible on any claims, which the insured will need to pay, or they will charge a rate based upon the cost being paid to the subcontractor for the job.
- A “Hard hammer”, on the other hand, is a bit more of a concern. A hard hammer states that if the hired subcontractor does not carry sufficient insurance coverage, and there is a claim, the general contractor will have no coverage. This means that any claims against the general contractor will have to be paid out of pocket, which could put the GC out of business and even induce bankruptcy depending on the size of the claim.
- In order to avoid getting caught in this situation you should require proof of coverage from all subcontractors (certificates of insurance as well as copies of the policies) throughout the policy year, and upon renewal to assure that you are not hiring uninsured contractors.
All of the above items that I mentioned are items that your insurance broker should speak with you about, if they haven’t already. Sure, there are costs that come with many of these coverages, but the alternative to paying for the coverage could be losing your business or your lively hood. An insurance broker’s job is to look out for his/her clients’ best interest and make sure that they have the coverages they need to protect themselves. If you are unsure if you have these items you should speak to your insurance broker immediately. Check your policy yourself to verify you have the correct coverage and forms attached. If your broker tells you these items aren’t on your policy you should begin to look for another broker who is really looking out for your best interest.
I hope this article provided you with some useful information!