Labor Law 240 and Loss Costs

Transcription

1 Labor Law 240 and Loss Costs In construction markets, contractors and owners purchase general liability insurance to protect themselves against the risks of lawsuit under the law governing negligence and strict liability. Insurers price this risk of tort liability through a variable called loss cost, which incorporates previous losses (e.g. indemnity payments for successful claims) in determining the expected risks faced by the insured. The available statistical evidence (visualized in Chart I and Table I) suggests that the relatively high loss costs in New York construction liability insurance markets is connected to the uniquely expansive liability of N.Y. Labor Law 240(1). A 2012 report by Alliant Insurance Services, Inc. titled The Perfect Storm For New York Construction Insurance listed Labor Law 240 and the associated High Per Claims cost for Labor Law as two of the four main contributing elements increasing the cost of project risk for owners and contractors in New York. This is consistent with the dramatic decline in general liability insurance loss costs observed following the 1996 reform of a similar statute in Illinois (Chart I below). Even before the slowdown in construction markets and the global financial crisis, the report notes, insurers had operated at a loss in many of the construction classes of commercial general liability insurance, making up for these losses through robust investment income. The slowdown in construction markets led to falling interest rates, which weakened investment income for insurers, while the frequency and cost of claims under Labor Law 240(1) rose. This created what the report describes as The Perfect Storm for construction liability insurance, producing an insurance coverage gap, with increasing rates in both primary and excess insurance markets. 1

2 One concern shared by those writing in the New York Law Journal about Labor Law 240, whether associated with the plaintiffs bar or the defense, is that there is a substantial amount of legal ambiguity surrounding the Labor Law 240 statute, which hasn t been legislatively amended since the 1980s. 1 As the Hon. George M. Heymann wrote in a 2013 article for the New York State Bar Journal, until legislative amendments clarify the statute, courts will continue to confront the highly elusive goal of defining with precision the statutory terms [quoting Joblon v. Solow, 1998] of the ever-evolving Scaffold Law. 2 Since Joblon v. Solow (1998), when the New York State Court of Appeals explicitly sought to minimize the need for litigation, New York s highest court has, in case after case, sought to address the statute s ambiguity. 3 The Court s attempts to clarify the law have not reduced Labor Law 240 litigation and, as demonstrated in Chart II, the prevalence of case law citing the statute has risen dramatically. In an April, 2013 article for the New York Law Journal, New York City lawyer Brian J. Shoot stated that the expansive liability of Labor Law 240(1) is not actually unique to New York State and that other states maintain similar laws. A January 2014 article in the New York Daily News by Gary La Barbera, President of the Building and Construction Trades Council of Greater New York, repeated this claim. While it is semantically true that these statutes are Scaffold Laws, in that they establish a basis for liability in the establishment of a safe workplace at height, a thorough review in Westlaw of the state-level statutes cited by Shoot demonstrated that the similarities are mostly semantic. Each one explicitly uses or has been firmly interpreted with the language of negligence, emphasizing the reasonable foreseeability and adequacy of relevant safety measures. Following the repeal of Illinois Structural Work Act in 1996, there is no other 1 Plaintiffs Bar: Temkin 2000; Faley & Alonso 2010; Kelner & Kelner 2012; Defense: Ehrlich 2009; Renzulli & Tait 2010; Ehrlich Hon. George M. Heymann, New York's Scaffold Law and the Evolution of Elevation, New York State Bar Journal, 85-JAN N.Y. St. B.J. 10 2

3 state-level statute governing work at height with a history of such expansive interpretation and ambiguity. The frequency and magnitude of the claims driving loss costs for the construction insurance market reflects the uniquely high level of liability of high price insurance claims under the Labor Law statutes. Indeed, New York s exceptionally loss costs for commercial general liability in construction classes are present not only in New York City, one of the country s most lucrative property and development markets, but also in Upstate New York, one of the country s most depressed markets. Uniting these two construction markets is a shared exposure to the liability emerging from public policy in Albany. New York State s high loss costs are particularly intriguing given that other states of similar levels of economic activity, wealth, and demographics have several times lower loss costs. It is unambiguous that Labor Law 240(1) reflects a wider liability standard for accidents in elevated construction than found in any other state, a fact generally agreed upon by the law s detractors as well as by its proponents. It would be a remarkable coincidence, then, if New York s exceptionally high loss costs in liability insurance markets were due to factors beyond the state s unique laws widening liability for accidents. Even if the Labor Law 240(1) is not the sole driver of high loss costs for the associated insurance classes, to dismiss the role of the very statutes determining liability is to imply that the law and policymaking are impotent in their intended assignment of liability. This implication runs counter to the basic premise of any argument that the liability risks emanating from the Labor Law statutes provides strong safety incentives in an otherwise dangerous workplace. Additionally, the empirical research does not support a priori legal arguments that the law provides an effective incentive for reducing risk of fatal and nonfatal workplace injuries. 3 e.g. Blake v. N.H.S. (2004) and recent cases considering reasonable foreseeability. 3

4 The experience of Illinois, a state very structurally similar to New York, following the 1996 reform of a statute similar to Labor Law 240 suggests that insurance market conditions would improve if liability under the law were reduced. This is depicted in Chart I below, which indicates a sharp reduction in loss costs for general liability insurance following reform. Because Upstate New York differs so greatly from New York City in terms of economic and demographic factors, it provides a good test of whether fixed effects specific to New York drive high loss costs. As depicted in Table I below (covering data), after controlling for the fixed effects of each state included in the loss cost data, loss costs across all classes tend to be higher in New York City and lower in Upstate New York, but the observed effect of Labor Law 240 on exposed classes of insurance in New York State (including NYC) greatly outweighs either of these fixed effects. While additional annual insurance data is required to conclusively link Labor Law 240(1) to exceptionally high loss costs, it is intuitive that the statutes establishing wide liability would lead to greater losses and hardening in liability insurance markets. This basic regression analysis, which used two years of ISO loss cost data ( ) examined loss costs from labor law-impacted and non-impacted insurance classes in New York City, New York State (excluding NYC), Ohio, Massachusetts, Pennsylvania, California, Connecticut, Florida, Illinois, New Jersey, Texas and a Multistate insurance pool. Dummy variables were assigned based on whether the loss cost was from New York City, New York State (excluding NYC) and the other states, in a Labor Law 240-impacted type of insurance class, and in a Labor Law 240-impacted sector in New York. The presence of Labor Law 240 in New York is associated with more than 42 points higher loss costs (statistically significant to less than.000), while the coefficient for New York City (all classes), one of the world s most expensive construction markets, is only 15 points higher. 4

5 LL240 Citations Chart I: Illinois Premises/Operations Historical Loss Costs, (ISO data) $100 $90 $80 $70 $60 $50 $40 $30 $74.56 $35.90 $33.47 $32.90 Actual (Experience-Based) Loss Cost for Classes Presumed Having Significant Exposure To Scaffolding Claims $20 $10 $0 $8.83 $7.51 $15.31 $3.86 $ Accident Year Chart II: Annual Citations to the Labor Law 240(1) State in NYS Case Law Google Scholar Bloomberg Law

6 Table I: Basic Determinants of Loss Costs, New York vs. Labor Law 240, (State and Year Fixed Effects) (1) (2) VARIABLES Loss Costs Loss Costs All Insurance Classes, New York City [i] ** (4.570) (5.275) All Insurance Classes, NYS (excluding NYC) [ii] (4.570) (5.275) LL 240 Exposed Classes, All States [iii] 13.44*** 13.44*** (1.793) (1.791) LL 240 Exposed Classes, New York City [iv] 59.32*** 59.32*** (5.945) (5.940) LL 240 Exposed Classes, NYS (excluding NYC) [v] 25.42*** 25.42*** (5.945) (5.940) All Insurance Classes, MA All Insurance Classes, PA 7.268* All Insurance Classes, CA 7.526* All Insurance Classes, CT 7.365* All Insurance Classes, FL All Insurance Classes, IL 6.879* All Insurance Classes, NJ 10.61*** All Insurance Classes, TX All Insurance Classes, Multi-state (excluding NYS) Year (1.608) Constant 3.525** (1.378) (3.085) Observations R-squared Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Ohio is the omitted category in state-level dummy variables. Where significant, coefficients reflect number of ISO loss costs units above or below the average baseline for that location [i] the estimated effect on loss costs from all insurance classes from being located in NYC [ii] the estimated effect on loss costs from all insurance classes from being located in NYS (excluding NYC) [iii] the estimated effect on loss costs from the LL240-impacted sector (across all states) [iv] the estimated effect on loss costs in NYC classes actually impacted by LL240 6

7 [v] the estimated effect on loss costs in NYS (excluding NYC) classes actually impacted by LL240 7