Monday morning December 13th an Appeal will be filed in the Appellate Division of the Southern District of NY that can have a significant chilling effect to those insurance carriers who underwrite NY Commercial Property Insurance , NY Commercial Liability Insurance, and NY Commercial Umbrella  Insurance. The case and question at hand revolve around funding the exorbitant defense costs for the myriad of additional insured’s of the structural steel sub contractor who was allegedly responsible for the crane collapse that occurred in New York City in March of 2009.

The question at hand is the issue of legal defense costs as it relates to a NY commercial general liability insurance policy. I am only using this one name in this article because in my opinion this insurance carrier is not only unscrupulous, but set a benchmark for stupidity. Lincoln General, there I said it, more on them in another post.

Essentially the question arises that if a carrier (Lincoln General) puts there entire policy limits up, in this case $1million; does their obligation to pay for the defense of all the additional insured’s that were added to the policy by way of contract cease?  Defense council alleges that the duty to defend is quite broad, and secondly that defense of an insured or additional insured in a standard ISO policy is outside the coverage limits, thus Defense Council is contending that coverage is unlimited. In this particular case the defense costs for all of the defendants in the crane case could potentially reach $50 million dollars.

Lincoln General asserts that if the court forces it to abide by their defense obligation, potentially saddling them with a $50 mill legal bill, they will go into liquidation. The judge in this case does not want Lincoln General to go into liquidation because it will put into suspense the monetary awards due to the victims and their families of the crane collapse, which is not a tenable position for the judge to be in. Thus the judge has granted the motion of Lincoln Generals Counsel relieving them of their burden to pay for the defense of all of those additional insured’s.

Got it! Not so fast, the attorney’s for several of the additional insured’s are crying foul. It’s their contention the policy has no limit for defense and thus as a matter of law Lincoln General, and their parent must pay for defense. The judge who heard the case in the lower level made a business decision and not a decision based upon current NY State Law, which is the basis for their appeal.

At stake; if the Appellate Court Agrees with the position of the additional insured’s, that defense coverage is unlimited and that Lincoln General is on the hook for all of the additional insured legal bills it has the potential of sending shock waves throughout the NY Commercial General Liability system. This decision potentially turns upside down the whole pricing structure of insurance. Insurance is based upon actuarial tables that are built upon years of collected data. They parse that data, calculate both probabilities of loss, and the financial exposure should the loss occur to arrive at the insurance premium. An Appellate ruling like this put the carriers on the hook for an enormous financial exposure to loss that their actuarial tables have not contemplated or priced for. When this happens, the insurance carriers visceral reaction is to leave the insurance market for a particular line or class of business. In this case it’s NY Construction Liability Insurance market that is at stake.

NY Commercial General liability insurance is classic Keynesian supply and demand. The more insurance carriers putting their paper out there to insure your business, the lower the rates. When the inverse is true rates go up. Thus it’s our contention that an Appellate ruling in favor of the additional insured’s here may be the catalyst for shockingly high insurance premiums for construction firms already realing from razor thin profit margins on the scarce few RFP’s.

If you’re an insurance carrier don’t wait to see white smoke from the chimney of the Appellate Division. Be proactive, file for an endorsement that will specifically limit or cap defense costs, especially when you put up your policy limits. $50 million in legal bills was never your intent, and was never actuarially calculated in your rates. Be specific, and don’t be greedy by making defense costs within the policy limits as that degrades coverage for the purchaser and leaves them exposed to a net income loss. Sharp brokers will scream to high heaven and worse, not place your product.  

If you are a buyer of NY Commercial General liability insurance it may seem counter intuitive to root for a denial for the legal costs of the additional insured however I assure you that’s exactly what you should root for. You as a purchaser of NY Commercial General liability insurance need a stable market, one in which the carriers can reasonably calculate premiums, losses and profitability. When the NY insurance market cannot execute that basic calculus, it ceases to function leaving you the purchaser with less choice, resulting in higher premiums and sparse coverage!