Action over captives: solving a contractor’s nightmare

The secret to making a small fortune? Start with a large one and invest in XXX (you can fill in the blanks).

The first time I heard this phrase, it was applied to the stock market. Junior Johnson has used it for auto racing and Elon Musk applied it to purchasing a social media company. I would like to add New York contractors to my growing list—as well as the insurance companies that cover these contractors’ general liability insurance.

The terms action over coverage, Labor Law, scaffold law, and third-party action over are all used interchangeably when talking about New York contractors’ general liability insurance. An “action over” claim is a type of suit brought by an injured worker against a third party to contribute to their work-related injury after collecting workers’ compensation benefits from their employer.

Typically, employees can’t sue their employers because of workers’ compensation statutes, but they can sue the property owners and general contractors at a job site. Contractually, the property owners and general contractors often tender these claims back to the injured worker’s employer and that employer’s general liability carrier. The “action over” refers to employee collecting compensation above and beyond the employer’s workers’ compensation cover.

This unique and antiquated law/nightmare is known as Labor Law 240 and 241, and it was enacted in 1885. At that time, Trinity Church on Wall Street was the tallest building in the city. Other states and cities had similar laws, but New York’s is the only one left. The law requires owners and contractors to provide safety devices to workers, giving them protection from the risks posed by gravity such as falling from a height and/or being struck by an object that has fallen from a height. They are referred to legally as “gravity” risk. On the surface, this sounds reasonable—right?

But this law has created havoc for courts and insurers. Due to the wording of the law, defending and winning a case is a monumental task. Third-party action over claims occur when an employee’s lawsuit against a third party rebounds back to the injured worker’s employer because of that employer’s prior contractual arrangement with the third party. Therefore, this law forces general contractors and property owners to shoulder the burden of absolute liability. Essentially, you could be held responsible even if you provided all the safety training and gear.

If you are working on a job or have been hired as a general contractor in New York, you can be forced to defend and possibly settle claims made by your employees or other contractor’s injured employees. Sounds unfair? In any other state these employees are not your responsibility, but in New York, they are. When it comes to “gravity-related” injuries it doesn’t even matter who is at fault—the contractors and property owners are held responsible.

Fixes for action over

There are currently few fixes for the action over problem. One is to stay out of New York—which is not realistic if you want to make that small fortune. The second is working with other contractors and politicians to reform the law. The third is making sure you and your subcontractors have proper insurance and risk transfer agreements.

A qualified New York construction attorney can help you draft your risk transfer agreements. Subcontractors, however, are often required to sign the general contractor’s transfer agreement prepared by a similarly qualified attorney, limiting your ability to transfer risk. Now more than ever, finding proper or adequate insurance is also difficult. Smaller subs are finding it almost impossible and/or cost-prohibitive to purchase general liability without an action over exclusion. Unfortunately, adding the sub exposure to the contractor’s own coverage has become one of the few options available.

What if I don’t want my current captive to help?

Recently, I was approached by a medium-sized contractor specialising in New York roofing. It typically operates as a subcontractor for larger projects and often hires its own subcontractors to work on specific projects. Most of these subs work exclusively for my client, and they find it cost-prohibitive or impossible to purchase general liability coverage without an action over exclusion—but my client needs these subs to get their work done.

The firm’s broker and risk manager came to me knowing full well they had assumed the subs’ action over risk on their balance sheet by employing underinsured subs. In addition, the risk manager did not want to put the added exposure on the parent’s liability policy. The subs’ losses would adversely impacting the corporate loss experience.

A captive can still be the solution

In this instance, the solution was a new captive—a contractual liability policy covering the contractual exposure assumed under the transfer agreement. The underinsured subs funded the captive with the savings from not having to purchase overpriced commercial insurance with exclusions.

Sure, my client still has the ultimate exposure if for some reason the captive runs out of money, but they had this exposure already. This new captive protects both the parent’s balance sheet and its insurance programme from the subs’ losses. If the new captive does have a loss that exceeds the premium, contractually, they can ask the subs for additional funding or, in an emergency, use their corporate programme. It’s not the perfect solution, but it could possibly save a small fortune.

The bottom line is that there are limited exemptions to this New York law, and without a law change, solutions are limited too. Assuming a large gap in coverage or taking on a large unfunded liability is not good business, as one claim could result in significant financial loss. So, to save a fortune, use a captive.

Greg Lang is the founder of the Reinsurance and Insurance Network (RAIN). He can be contacted at: glang@rainllc.com