Long Island Business News: Rising construction insurance costs, Scaffold Law threaten development on LI
By: Jared Scot
In every industry, rising costs have been a common occurrence for the past few years, and consumers have noticed higher prices across a wide range of goods and services. On Long Island, builders have felt the pinch, facing significant increases in construction insurance premiums.
Many blame New York labor law section 240/241, known as the Scaffold Law, for the state’s sky-high builder’s insurance costs. Passed in 1885, the Scaffold Law imposes an absolute liability on builders, contractors, and commercial property owners for accidents involving falls at construction sites.
“This law provided a pathway for injured subcontractors to file liability claims in addition to their workers compensation benefits,” says Joanne Bentivegna, risk manager at JB Risk Services in Bohemia. “If a person is injured, it is not a question of whether the builder and property owner will be sued, it is just a question of when and how much the claims will be.”
Bentivegna believes this can place an untenable burden on developers. “Due to the law and the risk transfer tools used in construction contracts, the builder is typically in a position to carry the risk burden of the owner they are working for,” she says. “As an example; if an owner is sued for a subcontractor’s fall that occurs at their project site, they will use their construction contract to require the builder to hold them harmless, defend them and indemnify them for the owner’s loss.”
This is a key reason for rising construction insurance costs, Bentivegna explains. “When there are claims that are paid by the builder’s insurance carrier, the builder bears the burden with increased insurance premiums in the future.”
Though it has been under attack by lobbyists and industry groups for decades, the nearly 140-year-old law has survived, thanks in part to support from construction unions. Construction work is dangerous, and the industry remains one of the deadliest for workers—10 construction workers died in New York in 2023, including three on Long Island, according to data compiled by New York State.
The existence of the Scaffold Law may not fully explain the staggering increase in the cost of insurance. National data from the Council of Independent Insurance Agents & Brokers, a Washington D.C.-based insurance industry association, shows construction insurance premiums of all kinds rose 4.6% in the first quarter of 2024, driven by “growing project sizes due to rising labor and material costs,” according to reports from carriers who offer coverage of property, equipment, and builders’ risk.
A deeper look into the data reveals that the cost of almost every type of insurance is on the rise. The trade group also notes that in the first half of 2024, auto liability insurance premiums jumped between 8% to as much as 18%, and excess liability insurance premiums rose 5% to 12%.
While builder’s insurance carriers have experienced significant volatility in the past few years, the sector has become increasingly consolidated, and insurance company revenues have reflected the effects of the industry’s concentration. According to a 2024 report from IBIS World, the total number of insurance companies providing contractor’s insurance has significantly decreased. “This consolidation gives insurers greater bargaining power and allows them more control over pricing and policy terms,” a summary of the report reads.
While the thinning of competition among carriers of construction insurance could be indicative of a broader industry trend pushing premiums higher, risk management experts cite the Scaffold Law as a barrier to entry for potential competition in the New York insurance marketplace.
“The single biggest change from an insurance point of view that would lead to an increase in development is repealing the Scaffold Law,” says Andrew Nigri, president of Sancus Insurance Agency in Islandia. “If this were to occur, claim payouts would be reduced, and fraudulent claims would plummet. Subsequently, more insurance companies would enter the marketplace providing more competition, which would result in reduced insurance premiums.”
Nigri points to the 1995 repeal of a similar labor law in Illinois, which was notably followed by a drop in construction related injuries and fatalities, as well as an increase in construction worker’s union membership.
Besides advocating for a repeal of the Scaffold Law, advisors offer a few strategies for builders looking to keep insurance costs down. “Developers can benefit from the economy of size by having a rolling policy, which is bundling several projects on one rolling insurance policy, [or by] raising deductibles,” Rosen suggests. “Having a $250,000 self-insured retention, which can substantially lower the cost of insurance, [is something] few contractors would have ever considered in the past.”
Rosen also cautions against assuming more risk than what is necessary. “It is important to make sure you have the proper risk transfer to your subcontractors, and you pre-qualify subcontractors to provide that a contractor’s insurance policy does not have to respond to a subcontractor’s loss,” he says.
Bentivegna asserts that eliminating the Scaffold Law would be a “huge step” toward promoting development on Long Island, as it would shift a liability burden away from developers. “Most states use workers’ compensation as a sole remedy for contractors injuries, and their ‘threshold’ to be able to sue a builder is much more limited,” she explains.
According to Nigri, the need for more competition in the insurance marketplace is still very apparent. “Once the marketplace is expanded, many projects that were cost prohibitive due to insurance costs would move forward.”