There’s no such thing as a small job. Whether a minor lobby repair or a major capital improvement, whenever a contractor is hired to work in a co-op or condominium, if the contractor or one of their employees gets injured, the corporation or association could find itself as a party in a lawsuit.

“The labor laws in New York are very strict, and they are not in the property owner’s favor. So realistically, the property owner is ultimately responsible for their site. If a contractor is injured, it usually goes back to the property owner even though they may not have been negligent,” explains Edward Mackoul, CIC, the president of Mackoul & Associates, Inc., an insurance brokerage in Island Park, New York.

Overly Litigious

Too often, even minor injuries lead to major legal issues. “In this society, everybody’s looking to sue,” says Peter Lehr, the director of property management at Kaled Management Corp. in Westbury. “You throw as many names as you can against the wall and see what sticks.”

And the stakes keep getting higher and higher. “Nobody sues for $1 million today,” says Mackoul. “They shoot for $5 million. And their spouse sues for loss of consortium,” which he explains is the deprivation of benefits to the family caused by the worker’s disability.

The good news is that by properly vetting contractors before you hire them and signing them to meticulously-detailed contracts, your building can ward off lawsuits or at least mitigate damages if an incident does wind up in the courtroom.

Only the Licensed Need Apply

There are innumerable reasons why every general contractor, subcontractor or any other hired professional working in the building should be licensed.

“The most obvious,” says Andrew D. Stern, a senior associate attorney with the law firm of Tane Waterman & Wurtzel PC in New York City, “is that following the advice of licensed contractors is one of the ways to ensure that a board's decision is protected by the Business Judgment Rule. Hiring a licensed contractor—whether an engineer or an architect—and following the advice that they give you is your best safeguard against any allegations that you haven't behaved in the best interest of the cooperative or condominium.”

Fortunately, with few exceptions, individual board members are not responsible when jobs go bad. According to Sandra Jacobus, a partner with the Manhattan-based law firm of Ganfer & Shore, LLP, “Individual directors on the board are indemnified by the building itself, and they are not personally responsible for any decisions that are made by the board. If someone acting in good faith thought they were dealing with contractors who were appropriate and qualified for the job, the courts generally would rely on the Business Judgment Rule — that the board used their best business judgment.”

General contractors and subcontractors hired to work on projects for co-ops or condominiums in New York City are required to be licensed by the Department of Buildings (DOB). Their salaried workers don’t need licenses per se and are permitted to work under the contractor’s license.

It’s easy to verify that a contractor is licensed. Any job substantial enough to require a Department of Buildings permit must employ licensed contractors. So if the city issues the permit, you can be pretty certain that your contractor is licensed. In any case, says Lehr, you can just type the person’s name into the DOB website at www.NYC.gov to validate them.

Lehr cautions smaller co-ops and condos—especially those that are self-managed and perhaps less savvy in dealing with contractors—to demand to see the contractor’s license, not just take his or her word for it. “A lot of guys throw up a sign on the door of their van that says ‘so-and-so contracting’ and they are not really a contractor,” that is, licensed by the DOB. “You have to be careful.”

Insurance 101

Especially with larger projects, the co-op corporation or condo association should load contracts with an extensive listing of insurance requirements and limitations to the building’s liability.

“To protect themselves, it's more than just the insurance itself in the contract,” says Mackoul. First, the contract must indicate the extent of the general liability insurance coverage the contractor must maintain. Second, it should require workers compensation insurance. Third, there should be a commercial umbrella, “which is just extra liability insurance,” he explains.

In addition, the contract needs to stipulate that the property owner—in this case, the cooperative corporation or condominium association—is additionally insured on the insurance policy. “It is critical that this be included in the contract,” explains Mackoul, “because even while the contractor’s insurance policy will likely have a blanket additional insured endorsement, which automatically additionally insures the property,” some sneaky fine print in the policy could take that protection away.

There could be a clause in small print that says the additional insurance endorsement applies only if the contract specifically calls for it. “If you don't have a written contract with the contractor that says ‘you need to add us as additional insured,’ ” says Mackoul, you might be out of luck—“even though you might have gotten something from the broker saying you are insured.” The contract should also include a “hold harmless agreement” ensuring that the contractor is going to hold the owner and the property manager harmless for any negligence on their part.

To be 100 percent sure the property is protected, Mackoul recommends demanding an actual copy of the contract or policy, not just a certificate of insurance, and running the contract by the building's insurance broker.

“We can look at a certificate of insurance and tell you the limits look good and the company looks fine,” explains Mackoul, “but we can't tell you if there are specific endorsements and exclusions in that policy. So we request a full copy of the policy.”

Mackoul is particularly interested in making sure the contractor’s insurance policy contains “a ‘third-party over action,’ ” he says, “which is an exclusion to injuries of the contractor’s or subcontractor's employees. It's important because in New York workmen’s compensation basically restricts you from suing your employer. If an employee of the contractor gets injured, he can't sue his employer, so he'll turn around and sue the property, which he can do.”

If the contractor’s insurance doesn't include coverage for injuries to their employees, the insurance company won't pay the damages. In theory, the co-op or condo can go after the contractor. “But,” says Mackoul, “if the contractor doesn't have any money, attorneys get involved. If he has an LLC and he dissolves the LLC, it goes back to the property owner. New York property lawsuits are normally labor law claims—injuries to contractors, injuries to employees.”

Most larger co-ops and condos these days have commercial umbrellas with coverage of $25 million to $100 million, so they have the insurance in place to cover these types of damages. But if their insurance pays out, say, $3 million in such a claim, says Mackoul, “at best your insurance rates are going up next year. At worst, you're going to be canceled by the company.” And shopping for another insurance company with the claim on the property’s record could be a nightmare.

When undertaking a lengthy project, the manager should keep a close watch on the contractor’s policy expiration dates. “If it is a long job,” says Mackoul, “they might say, ‘if we are beginning in January, I need you to show me again in November that you still have insurance.’ ”

If the building discovers that the contractor's insurance has expired, work must be suspended immediately. At that point, the pros say you might give the contractor a few days to produce an active policy. If they fail to produce that, send them packing.

Attorneys recommend including a termination clause in the contract to protect the building in case you discover mid-project that the contractor misrepresented their coverage from the outset.

According to attorney Leonard Khandros, who is also with Tane Waterman & Wurtzel, “We want to put into the contract that we want representation from the contractor that they are duly licensed and that they have the ability, the knowledge and the skill to complete the work, so that if they don't, that's something you can seek in litigation as misrepresentation.”

“If we find out they don't have proper licensing or insurance,” adds Khandros, “we would give them notice that they are terminated, and from a litigation standpoint, if the group misrepresented in the contract that they were a licensed contractor and we discover they were not, we would hold off on paying them for any work that they did.”

Lastly, you want to make sure the company insuring the contractor is solid. “You don’t want an insurance company that is here today and gone tomorrow when you might have a claim,” warns Jacobus. Especially with big jobs, make sure the company is highly rated by A.M. Best, which issues reports on the financial-strength ratings of insurance companies, measuring their ability to pay claims.

Indemnification

In addition to provisions in the contract determining the scope of the contractor’s insurance, attorneys want to see an indemnification rider. According to Khandros, “If the contractor ends up doing something that is a result of negligence or intentional wrongdoing, you want to obtain indemnification. You want to put the contractor on the hook.”

The American Institute of Architects (AIA) issues contract forms that can be filled in by both parties for small jobs and used as the base document for larger jobs, to which riders can be negotiated and added. Beyond saving the building time and money, the AIA contracts are advantageous because they are informed by legal precedence. “The terms have been litigated,” explains Stern, “so the parties have the comfort of being able to anticipate how courts will interpret a particular term, whether that term relates to life insurance or indemnification or any other aspect of the deal.”

One thing boards do not have to worry about is shareholders second-guessing their choice of contractors or the terms of contracts. “The individual shareholder has no right to look at the documentation of the contractor,” says Jacobus. “That is the job of the board of directors. When they are elected the individual unit owners are basically allocating those responsibilities to the boards.”

In the end, even though a co-op or condo board member has a fiduciary duty to be at least conversant about the process of vetting and dealing with contractors, unless that board member happens to be an insurance or construction attorney, really knowing the intricacies of the relationship and its various potential pitfalls is a pretty tall order.     Fortunately, there are legal and insurance professionals whose sole job it is to protect their clients—boards and buildings just like yours—from those headaches.     

Steven Cutler is a freelance writer and a frequent contributor to The Cooperator.