The Office of General Counsel issued the following informal opinion on July 11, 2000, representing the position of the New York State Insurance Department.
RE: State Agencies and Municipalities Insurer Rating Requirements
Question Presented
Are there any provisions in the New York Insurance Law, or regulations related thereto, that require a party, who has contracted to work on a state agency or municipal project, to be insured by an A-or-better rated insurer?
Conclusion
There are no provisions in the New York Insurance Law, or regulations related thereto, that specifically require a party, who has contracted to work on a state agency or municipal project, to be insured by an A-or-better rated insurer. However, N.Y. Ins. Law § 2504 (McKinney 1985) does address the right of state agencies and municipalities to impose insurer-quality standards on competitive bidders of public building and construction contracts.
Facts
An Agents Association inquired whether the requirement to be insured by an A-or-better rated insurer, which is imposed on parties who have contracted to perform work for or on behalf of state agencies and municipalities, stems from a provision in the New York Insurance Law or any related regulation.
Analysis
There are no provisions in the New York Insurance Law, or the regulations related thereto, that require a party, who has contracted to perform work for or on behalf of a state agency or municipality, to be insured by an A-or-better rated insurer. The particular agency or municipality in question should be consulted to determine whether there is a statutory or regulatory basis, outside of the New York Insurance Law, for its insurer-rating requirement.
The New York Insurance Law does, however, provide state agencies and municipalities with the right to impose certain insurer requirements on competitive bidders with respect to public building and construction contracts, while at the same time prohibiting, with a few exceptions, the direction of bidders to obtain insurance from or through a particular insurer, agent or broker. N.Y. Ins. Law § 2504 (McKinney 1985) (emphasis added) states:
(a) (1) No officer or employee of this state, or of any public corporation as defined in section sixty-six of the general construction law, or of any public authority, and no person acting or purporting to act on behalf of such officer, employee, public corporation or public authority, shall, with respect to any public building or construction contract which is about to be, or which has been, competitively bid, require the bidder to make application to any particular insurance company, agent or broker for or to obtain or procure therefrom, any surety bond or contract of insurance specified in connection with such contract, or specified by any law, general, special or local.
(2) In paragraph one hereof, "public corporation" and "public authority" shall not include:
(A) public corporation or public authority created pursuant to agreement or compact with another state, or (B) the city of New York, a public corporation or public authority, in connection with the construction of electrical generating and transmission facilities or construction, extensions and additions of light rail or heavy rail rapid transit and commuter railroads.
(b) No such officer or employee, and no person, firm or corporation acting or purporting to act on behalf of such officer or employee, shall negotiate, make application for, obtain or procure any of such surety bonds or contracts of insurance (except contracts of insurance for builders risk or owners protective liability) which can be obtained or procured by the bidder, contractor or subcontractor.
(c) This section shall not, however, prevent the exercise by such officer or employee on behalf of the state or such public corporation or public authority of its right to approve the form, sufficiency, or manner of execution, of surety bonds or contracts of insurance furnished by the insurance company selected by the bidder to underwrite such bonds or contracts. Any provisions in any invitation for bids, or in any of the contract documents, in conflict herewith are contrary to the public policy of this state.
The term "sufficiency", as it is used in the Insurance Law, is not defined by statute. However, the term has been defined by case law as "marked by quantity, scope, power, or quality to meet with the demands, wants, or needs of a situation or of a proposed use or end." Aetna Casualty and Surety Co. v. County of Nassau, 221 A.D.2d 107, 112, 645 N.Y.S.2d 480, 484 (2nd Dept 1996) (citation omitted).
In Aetna, the court held that a local government had the authority to prohibit an insurer from acting as a surety for the performance of any public work projects within its county while the insurer was in default on a surety bond it had previously issued. The court, in essence, held that § 2504 (c) empowers a governmental authority to decide, for itself, whether the bonds and contracts of insurance it is offered are acceptable.
Thus, §2504 (c) effectively enables state agencies and municipalities to impose a specified Bests rating requirement on the bonds and contracts of insurance offered by competitive bidders of public building and construction contracts, subject, however, to any restrictions that may be imposed by other governing laws, regulations or guidelines. Additionally, the rating requirement may not be based on arbitrary standards, such that the effect is the direction of the bidder to a particular insurer, broker or agent, which is, as already noted, violative of the Insurance Law.
For further information, you may contact Attorney Sally Geisel at the New York City Office.