Market Trends & Best Practices: Liability Insurance for NYC Condominiums and Cooperatives in 2022

Market Trends & Best Practices: Liability Insurance for NYC Condominiums & Cooperatives in 2022

By Sean Kent, CPCU, senior vice president-insurance, FirstService Financial

Sean Kent

To describe New York City’s current liability insurance marketplace for condominiums and cooperatives as “challenging” would be an understatement. For two years, underwriters and insurance professionals specializing in New York City’s multifamily residential sector have lamented over the difficulties in obtaining competitive underwriting terms for general liability and umbrella insurance policies. Those difficulties have only worsened to the point where many believe that the situation is the worst it’s ever been, especially for umbrella or, more correctly, excess liability insurance.

As a subsidiary of FirstService Residential — the largest property management company in North America — FirstService Financial facilitates insurance placements and renewals for more than 8,000 associations annually, including nearly 500 condos and co-ops in New York City. These properties have historically relied on Risk Purchasing Groups (RPGs) to procure umbrella coverage with high limits and robust coverage at relatively low costs. An RPG is a group formed by an underwriter representing an insurance company or multiple insurance companies, with the goal of providing competitive insurance terms to a group of insureds. Umbrella policies serve as protection for associations in the event of major or catastrophic liability claims stemming from bodily injury or property damage that exceed the limits of a primary general liability policy.

Considering the litigious nature of plaintiff attorneys in New York City and unfavorable laws that present a greater liability exposure to building owners, access to RPGs has been critical for brokers seeking umbrella coverage for condos and co-ops.

Umbrella premiums were typically a small percentage of a building’s total insurance premium and, many would argue, far underpriced. That trend is ending, as options are now scarce and premiums continue to rise.

Reasons for 2022 Underwriting Market Conditions

Recently, a few of the remaining umbrella RPGs offering excess liability coverage in New York City have announced they will no longer accept applications for quotes, are canceling many existing policies and will add coverage limitations or exclusions that have a significant impact on the overall scope of coverage. Other umbrella RPGs have exited the marketplace, citing poor profitability due to an increase in severe claims with settlements in the tens of millions of dollars. Eligibility for programs has also become more stringent, and buildings that qualify are seeing significant premium increases for umbrella coverage with a reduction on limits and coverage. Here are some reasons why:

1. Large liability claims can take years to develop. The evolution of a bodily injury or property damage liability claim begins with coverage under the general liability policy. Most general liability policies have a liability

limit of $1 million per occurrence. In New York, average jury verdicts have ballooned, forcing insurance carriers to pay much larger settlements than the initial prediction. Many claims exceed the $1 million per occurrence liability limit for primary general liability policies, with final claim amounts in the tens of millions of dollars.

2. Labor Law 240. New York State’s “Scaffolding Law” imposes strict liability on building owners and property managers should a project-related injury occur to a contractor or subcontractor employee at a building.

If a contractor’s worker is injured while working at a building, there may be no need for that employee to prove that there was any negligence on the part of the building owner, nor is any negligence of the injured party relevant. The element of strict liability in these cases makes it almost certain that a building owner will be named in a suit, which requires their insurance carriers to defend such claims. Between legal fees and the potential for large judgments, the likelihood of these claims and the costs associated has liability insurance underwriters running for the hills.

Most of the underwriters still willing to offer liability coverage now make it standard practice to attach exclusions for claims arising from construction work. This protects the insurance carriers from astronomical payouts and also creates an intersection of exposure and liability coverage between the contractors, subcontractors and building owners. Many underwriters are requiring a review of the insurance policies for each contractor performing work at a building to validate they are carrying adequate liability coverage. If the contractor’s coverage does not meet their standards, underwriters are more inclined to attach construction exclusions.

Adequate Risk Transfer

It is crucial to review all contracts and audit the contractor’s insurance policies beyond certificates of insurance prior to awarding bids, and certainly before any project begins. These risk transfer practices can be onerous and require involvement from professionals with the expertise to review contractual language and insurance policies for potential pitfalls. Owners should enlist building counsel to review contractual language for agreements between owners and contractors bidding on a project. Indemnification and holding harmless language in the favor of building owners is critical.

In addition, the owner’s broker or third-party insurance consultants should assist in the review of the contractor’s insurance policies to ensure coverage is adequate and there are no construction-related exclusions that would prevent their policies from responding to a claim. A building owner’s insurance carrier might require a review of those policies as well. It is typically best to be proactive by obtaining the complete policies and performing audits ahead of time.

None of what’s been presented paints a pretty picture of New York City’s liability insurance marketplace. However, property managers, building owners, insurance brokers, carriers and the construction industry are all taking notice. While insurance premiums have been rising and maintaining competitive coverage is a challenge, stakeholders are working in collaboration to effectively transfer risk and bolster protection against major claims.