Two prominent New York real estate groups have joined a coalition spanning different industries in seeking changes to so-called lawsuit lending to try to lower high insurance costs.

The Empire State Chapter of Associated Builders and Contractors and the Real Estate Board of New York signed on to become members of Consumers for Fair Legal Funding, an organization founded in 2022. It was created to push for what it described in a statement as “commonsense regulations” for lawsuit lending, a practice also known as third-party litigation funding or litigation financing.

New York’s scaffold law, unique in the United States, holds contractors and property owners fully liable for injuries sustained by a worker regardless of their own negligence, the coalition said. The law has led to what the group describes as “fertile ground for fraudulent claims.” Those claims, and the lawsuit loans issued to those who file them, are contributing to rising insurance premiums, it said, adding that in turn drives up costs for infrastructure and affordable housing projects.

“The cost of construction in New York is at a crisis point,” Brian Sampson, president of the local Associated Builders and Contractors trade group, told CoStar News in an email. “Without meaningful change, most insurance carriers that provide general liability coverage will vacate the market due to the extreme exposure to fraudulent lawsuits. When that occurs, you’ll see construction slow to a crawl further exacerbating the housing crisis and the decline of our roads, bridges, sewers and other infrastructure. We need immediate relief which can start by controlling and regulating the lawsuit lending boondoggle.”

Since 1992, New York remains the only state in the nation that has a strict or absolute liability standard for gravity-related incidents on a construction site, Sampson said. The last state to repeal absolute liability was Illinois because of negative effects on economic development and the cost of construction, he said.

The standard has its supporters. New York injury law firms and labor unions maintain the scaffold law, first enacted in 1885, plays an important role in protecting workers and their rights on the job.

As a result of the scaffold law, the state, already known as one of the world's most expensive markets to build, has a much higher insurance cost, the groups say. Associated Builders and Contractors members around the country have a “significantly higher” lawsuit exposure in New York than other states, Sampson said.

For instance, the cost of a $100 million project in New Jersey to cover items such as workers compensation and general liability is about 2.5%, compared with about 11% in New York. “The labor market and material costs is no different,” Sampson said, adding the scaffold law is “the only thing that drives the cost difference.”

In another example, while the same request for a $100 million insurance policy would get six to eight quotes in New Jersey with deductibles ranging from $10,000 to $25,000, that request in New York will yield just one quote with deductibles in the $500,000 range, he said, adding the scaffold law is again the only difference. Come next year, such insurance costs in New York will rise to 13.5% for a $100 million project if no changes are made, Sampson said.

“Unchecked lawsuit lending is a significant concern for the real estate industry, as we have seen predatory business practices and frivolous lawsuits result from a lack of regulation,” Carl Hum, REBNY’s general counsel and senior vice president, said in the CFLC statement. “Lawmakers need to pass legislation this session that will prevent bad actors from taking advantage of unsuspecting victims. Without reform, insurance costs will continue to rise, making it more difficult than ever to build our way out of the state’s mounting housing supply crisis.”

Lawsuit lending involves often “deep-pocketed hedge funds” and other “completely unregulated” lenders that loan money with interest rates that could be as high as 100% or more to help borrowers bring lawsuits forward, the coalition said in the statement, adding borrowers could be in deeper debt as a result even if they win any settlement claims.

The coalition, with members including the New York State Restaurant Association and New York State Hospitality and Tourism Association, said it seeks an interest rate cap on lawsuit loans and the disclosure of loans in the litigation process to increase transparency and expose potential conflicts of interest.

Lawsuit lending, which started in Australia in the 1990s, could potentially be a $5 billion industry in the United States, the LexisNexis-owned news service State Net Capitol Journal reported in February, adding legislation dealing with the “highly secretive” and unregulated practice is pending in at least 10 states.

A case in point, legislatures in Indiana and West Virginia recently have taken significant steps to bring transparency to the industry, the U.S. Chamber of Commerce Institute for Legal Reform said this month.