The New York City Department of Buildings recently amended its regulations with respect to insurance that must be obtained by builders in order to obtain permits. The objective, at least in part, was to reduce the City's exposure to loss when things go wrong on construction sites. The resulting regulation, however, contained requirements with which compliance was literally impossible.

The New York City Department of Buildings recently amended its regulations with respect to insurance that must be obtained by builders in order to obtain permits. The objective, at least in part, was to reduce the City's exposure to loss when things go wrong on construction sites. The resulting regulation, however, contained requirements with which compliance was literally impossible.

Left unchanged, the regulation would either have ended the issuance of building permits or would have limited the issuance of permits to those who were able to secure certificates of dubious integrity. When the situation came to the attention of the New York State Bar Association, the Construction Law Committee of the Association assembled a Task Force on Construction Insurance to negotiate a solution with the City. After the Task Force conveyed its concerns to the City's Department of Buildings, the Department promptly scheduled a consultative meeting and began its own work on a proposed solution.

As originally drafted, the Regulation demanded that the insurance policies lack a "contractual liability exclusion," which means that the insurance company does not cover the policyholder for breaches of contract and the consequences of those breaches. The problem is that substantially all liability insurance contains this exclusion, because liability insurance protects against accidents, not breaches of contract. However, there are provisions, known as the "Insured Contract Exception," that restore coverage for some indemnity agreements, and it is on that exception rather than the whole exclusion, that the City's attention needed to be focused.

A second problem stemmed from the City's insistence that before a construction policy could be cancelled, written notice had to be given to the City. The issue of who is notified of an insurance cancellation has been an ongoing one, and it is likely that the last word has not been spoken: but the current state of the market provides for notice only to the "First Named Insured," and that is the developer, not the City.

Responding promptly to a Task Force enumeration of these problems and recommended amendments, on the evening of June 21, 2011, the Department of Buildings announced its policy in connection with the enforcement of the new regulation:

"The Department of Buildings has fully considered the comments contained in your email and the attached memorandum regarding Section 101-08 (Required Insurance and Indemnification) of the Department's Rules, and has decided to take the following action:

"(1) The Department will post a notice on its website to the effect that subdivision (d)(1)(i)(E)(1)(3) is clarified in the following way: the words "contractual liability exclusion" may be understood as "an Insured Contract Exception no less favorable to the insured than ISO Form CG 00 01 (12/07 ed.)."

"(2) The Department will not enforce subdivision (d)(1)(i)(F) beyond what is already required under New York Insurance Law regarding notice of cancellation or termination of general liability insurance policies."

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