The Office of General Counsel issued the following opinion on December 30, 2003, representing the position of the New York State Insurance Department.
Re: Credits Applied for Insurance Cost on Construction Bids
1) Where an owner or contractor provides wrap-up insurance 1 for a nonpublic construction project, and requires the bidding contractor or subcontractor to apply a credit to its bid for the cost of insurance, how is the credit to be calculated?
2) If the audit of an owner or contractors wrap-up insurance results in an increase in premium, is it permissible on a nonpublic construction project to require the hired contractor or subcontractor to increase the credit it applied to its bid to account for the increase in the wrap-up insurance premium?
1) The credit should reflect the cost the bidding contractor or subcontractor would have borne had it purchased its own insurance for the nonpublic construction project, pursuant to N.Y. Ins. Law § 2505(b) (McKinney 2000).
2) It is impermissible to require a hired contractor or subcontractor to increase the credit it applied to its bid to account for an audit increase in the wrap-up insurance premium, pursuant to N.Y. Ins. Law § 2505 (McKinney 2000).
The Department received a request for an opinion by a painting contractors employee, which does business in New York. Recently the employer bid on a project that was covered by an "OCIP," which we understand to mean is an owners and contractors insurance policy, commonly referred to as "wrap-up insurance." The employer provided its bid with a credit of $28,000 for the cost of insurance it presumably would have borne had it purchased its own insurance for the project. When the project concluded, the named insured on the OCIP provided the requestor with a "final audit" based on certified payrolls that the requestor provided, which resulted in a premium due over the original credit applied.
The requestor stated that the sponsor of the OCIP contends that it may charge back the additional premium arising from audit since this represents the amount the employer would have borne had it purchased its own insurance policy, rather than be covered under the OCIP.
N.Y. Ins. Law § 2505 (McKinney 2000) states:
(a) In any building or construction contract bid, negotiated or executed except as described in section two thousand five hundred four of this article, no contractor or subcontractor shall be required to pay premiums or related charges for policies of insurance or surety bonds specified in connection with such contract on policies or surety bonds acquired by an owner or other contractor. No contractor or subcontractor shall be required to make application to any particular insurance company, agent or broker for, or to obtain or procure therefrom, any policy of insurance or surety bond specified in connection with such contract, or specified by any law, general, special or local.
(b) This section shall not, however, prevent an owner or other contractor from providing all insurance policies or surety bonds required by such contract without reimbursement from the contractor or subcontractor. Nor shall it preclude such owner or contractor from requiring that the contractor or subcontractor provide a credit in his bid which reflects the amount the bidding contractor or subcontractor would otherwise add if he provided his own insurance as required in the bid specifications. This section shall not deny an owner or contractor the right to approve the form, sufficiency, or manner of execution, of any insurance policies or surety bonds furnished by the insurance company selected by the bidder. (emphasis added).
Thus, owners and contractors of nonpublic construction projects are permitted to purchase wrap-up insurance to cover persons and entities working on such projects for losses arising therefrom.2 An owner or contractor is prohibited from requiring a bidding or hired contractor or subcontractor to pay a premium or other related charge on the wrap-up insurance. However, such an owner or contractor may require that a bidding contractor or subcontractor provide a credit to his bid on a nonpublic construction project, which would be the cost it would have borne had it purchased its own insurance for the project.
With respect to an audit of an owners or contractors wrap-up insurance policy resulting in an increase in premium, it is impermissible to require a hired contractor or subcontractor to increase the credit that it applied to its bid. An adjustment to the credit is in effect a payment towards the wrap-up insurance premium, which is prohibited by N.Y. Ins. Law § 2505.
Additionally, an insurance agent or broker that aids an owner or contractor in violating N.Y. Ins. Law § 2505 may be considered to be acting in an untrustworthy manner under Article 21 of the New York Insurance Law, and may be subject to appropriate penalty.
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.
1 "Wrap-up insurance" refers to a policy, or series of policies, that are written to cover a specific project, and all the persons and entities that work on such project.
2 N.Y. Ins. Law § 2504 (McKinney 2000) applies to public construction contracts. It prohibits wrap-up insurance in that it prohibits any officer or employee of New York State or of any public corporation (including political subdivisions of the State) or public authority from requiring a bidder, with respect to any public building or construction project, to obtain insurance from any particular insurer, agent, or broker, subject to certain excepted types of public entities or projects (i.e., light rail, heavy rail rapid transit, and commuter railroads).