First Department finds factual issues in §241(6) exclusion, and holds that claim by a lessee’s contractor triggers the lessor’s indemnityPermalink
By: Michael E. Kar, Esq.
Date: December 27, 2017
On March 1, 2018, the First Department entered their decision in Karwowski v. 1407 Broadway Real Estate LLC. This decision gleans two important considerations for insurers and practitioners, in the Appellate Division’s: (i) holding that a lessor’s indemnity provision will be triggered by a claim by a lessee’s contractor; and (ii) finding of factual issues with the lower court’s exclusion of a contractor’s workshop from liability under 241(6).
Factual issue found in Labor Law §241(6) analysis:
At the Supreme Court below, Plaintiff’s claims under Labor Law §241(6) were dismissed. Section 241(6) imposes on property owners (and lessee’s under Article 10 of New York Labor Law) the duty to provide reasonable protection and safety for workers, and to comply with all Department of Labor regulations. The issue in application of §241(6) was, primarily, centered around the physical location at which the injury took place. The location was the 16th floor of the building in question. A portion of the 16th floor was XCEL’s in practice, an area where they would keep materials and tools used for renovations within the building. However, no personnel or office furniture existed in a permanent capacity, and XCEL had no lease and did not pay any rent for the space. XCEL maintains a separate permanent office and workshop in Queens.
In support of their motion for summary judgment as to the applicability of Labor Law §241(6), Defendant Cayre asserted that the 16th floor is a permanent workshop where “for the past 10 years, the… plaintiff reported to work each day….” Their argument concludes that due to these facts the 16th floor is not the statutorily protected “area in which construction, excavation or demolition work is being performed….” N.Y. Labor Law §241(6).
Arbitrating Indemnity Issues During the Pendency of a Supreme Court Action, by Arthur XanthosPermalink
Assume an Owner (O) hires a General Contractor (GC) to do work on a construction site, and the standard AIA form contract is executed containing a mandatory arbitration clause providing that "all disputes between the parties arising out of this agreement shall be resolved by binding arbitration under then applicable commercial arbitration rules". Plaintiff-worker (P) trips and falls while working on the site and sues both O and GC, alleging negligence, as well as violations of the New York State Labor Law (the "Lawsuit"). O and GC each answer the Lawsuit and assert cross-claims against each other for contribution, defense, and indemnification.
All of the above is standard fare and occurs almost reflexively. But then something unusual happens: O's counsel files an arbitration demand, demanding that GC arbitrate the issue of whether GC owes O defense and indemnification in the Lawsuit (the "Arbitration"). Inter-defendant arbitration of an indemnity obligation in the context of a pending personal injury lawsuit is an unusual tactic, and raises a host of procedural problems. For example, what happens to the rest of the case as the arbitration proceeds? What if the arbitration requires the resolution of other issues that have not yet been decided by the court? What if the arbitration takes the case beyond “standards and goals”? New York courts have come up with methods of dealing with the procedural problems. See, e.g., Weiss v Nath, 97 A.D.3d 661, 664 (2d Dep't 2012); County Glass & Metal Installers, Inc. v. Pavarini McGovern, LLC, 65 A.D.3d 940, 940-941 (1st Dep't 2009); and 624 Art Holdings, LLC v. Berry-Hill Galleries, Inc., 2012 N.Y. Misc. LEXIS 6440, 26-27 (N.Y. Sup. Ct. June 7, 2012). But even assuming counsel is willing to navigate the attendant procedural problems, in our opinion inter-defendant Arbitration of part of a Supreme Court action can only be justified in one of two circumstances:
1. Where a quicker resolution of the indemnity issue would occur in the Arbitration as opposed to the Lawsuit, and that speed is worth the arbitration fees; and/or
2. Where a more favorable resolution of the indemnity issue would occur in the Arbitration as opposed to the Lawsuit.
It is likely that New York counsel always will conclude that a quicker resolution would occur in the Arbitration. Counsel could also conclude that a more favorable resolution would occur in the Arbitration under the following scenarios:
1. If the rules applicable to the Arbitration (but not applicable to the Lawsuit) generate a better result -- of course then Arbitration would be advisable. But to make this decision counsel must retrieve the applicable Arbitration rules, review them for application to the indemnity issue, and compare the result with that obtained via the Lawsuit.
2. If the particular arbitrator used comes from a construction background and therefore knows or “feels” that such indemnity obligations should regularly be enforced -- here too Arbitration would be advisable.
So the conclusions are these: If the Arbitration would yield a more favorable result, choose inter-defendant arbitration regardless of the fees for arbitration. If the arbitration would yield a quicker result, and a result no worse than that yielded in Supreme Court, choose to arbitrate if you are willing to pay the cost to arbitrate in exchange for a speedier decision. In all other cases, bide your time and wait for the assigned Justice to make the decision on summary judgment.
Pre-Loss Risk Management Meetings with Insureds, by Arthur XanthosPermalink
In the case of a general contractor ("GC")insured, the procedure runs generally as follows: a GC that intends to develop land purchases a general liability insurance policy from an insurance carrier. As part of the insurance binder, the GC is obligated to meet with an attorney to review the subcontract agreements used by the GC, and to review the safety of its operations. (The carrier if it wishes can charge the GC a sum in addition to the premium to cover the cost of the meeting.) The meeting is then held between the attorney and the GC, during which subcontracts and insurance certificates are reviewed, and safety measures on the construction site are looked at (particularly those that might trigger New York State Labor Law liability). The attorney then makes suggestions to improve the GC's paperwork and its safety measures.
Rather than rewriting the insured's subcontracts entirely (an expensive, and likely vain pursuit), the attorney will want to leverage the time spent by focusing on three areas during the meeting with the insured: (1) the quality of the indemnity language in the insured's subcontracts; (2) the accuracy and proper wording of any insurance certificates from the subcontractors; and (3) the responsibility for safety on the construction site. It is these three areas that will pay the most dividends in the event of a loss.
In our experience conducting risk management meetings, not more than half of the contractor insureds we meet have both a valid indemnification provision in their favor, and a properly drafted insurance certificate from their subcontractors. Following a well run risk management meeting, however, the insured's subcontracts will have a valid and unambiguous indemnification clause running in favor of the insured, the insured's subcontractors will have made the insured an additional insured on the subcontractor's liability insurance policy, the insured will have received a tutorial on the strict safety rules applicable to owners and contractors on a construction site, and the carrier's adjustment of a future claim will be a matter of passing the defense and indemnity of the insured to the subcontractor and its insurance carrier.
So a proper risk management meeting will benefit both carrier and insured. For these reasons, all general liability insurance carriers should consider utilizing risk management meetings. Four points, however, should be kept in mind: (1) the insured is not always receptive to such meetings, even if the insurance binder requires it. Consequently, you will find that the meeting often takes place long after the insured starts work on the site; (2) you are counting on the insured taking the advice of the attorney. There is little recourse, however, if the insured does not do so (other than perhaps a non-renewal of the policy); (3) it is not a requirement that an attorney conduct these meetings -- an experienced adjuster can be just as effective; and (4) the average time to prepare for and conduct the meeting is six hours. The amount charged to the insured, if any, should reflect that anticipated cost.