By Henry L. Goldberg,

Managing PartnerThe New York metro construction insurance market is in turmoil. This extremely "hard" market is in sharp contrast to the general insurance market nation-wide which has reportedly softened considerably. Even in the New York City market, outside of the construction industry, the insurance market has softened.

This construction industry-specific insurance crisis may in large part be due to the continuation, without critically needed reform, of New York's Scaffold Law (Labor Law 240) and its "strict liability" standard. [New York State is the last of all fifty states not to reform such statute.] However, Labor Law 240 is clearly not, in our opinion, the sole reason for the current market conditions in New York. Nor are the extreme jury awards that have been rendered by New York City-based trial courts. We believe, rather, that "contractual risk transfer" (CRT) is a major cause of the problem, and even if Labor Law 240 were to be reformed overnight, the current market conditions would, for some time, still be with us.

It might be argued that contractual risk transfer has gotten so aggressive in construction contracting in New York because of Labor Law 240 or excessive, local jury awards, and this may be partially true, but today, among insurance professionals, CRT seems to be the long term concern to watch out for. The risk today, for multiple reasons, has never been greater, and the need to be able to knowledgeably respond to CRT provisions in construction contract insurance specs is all the more critical now as a result.

Typical construction agreements routinely require specific types and amounts of insurance coverage. The contract will also designate the specific types of insurance required (i.e., general liability, workers' compensation, auto, umbrella/ excess, etc.) and the minimum liability required for each.

However, nearly every construction contract today will also include a risk sharing or, more accurately, a "contractual risk transferring" (CRT) provision requiring all downstream parties (first, and lower tier subs and suppliers) to assume the duty to defend and indemnify the upstream parties (Owner, Developer, GC or CM). This is done in two ways. First, the downstream parties must add all the upstream parties as "additional insureds" under the downstream parties' policies. Second, the downstream subcontractors must also contractually bind themselves to protect the upstreamparties through contractual indemnification clauses. Such indemnification provides important protection for the upstream parties in the event that insurance coverage of any subcontractor is denied for any reason. In such case, the downstream parties are still contractually bound to defend and indemnify the upstream entities on their own, without the benefit of the denied coverage.