The Office of General Counsel issued the following opinion on November 1, 2004, representing the position of the New York State Insurance Department.
Re: Municipality Contractual Requirements
Does the New York Insurance Law prohibit a municipality from requiring a contractor that is bidding on a public project to use an insurer that is authorized to do an insurance business in New York?
No, the New York Insurance Law does not prohibit a municipality from requiring a contractor that is bidding on a public project to use an insurer that is authorized to do an insurance business in New York.
No specific facts were provided.
There are no provisions in the New York Insurance Law, or the regulations related thereto, that prohibit a municipality from requiring a contractor that is bidding on a public project to use an insurer that is authorized to do an insurance business in New York. The particular municipality in question may be consulted to determine whether there is a statutory or regulatory basis, outside of the New York Insurance Law, for its authorized-insurer requirement.
The New York Insurance Law does provide municipalities (and state agencies) with the specific 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 2000) (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) 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 municipalities (and state agencies) to require a contractor that is bidding on a public project to use an insurer that is authorized to do an insurance business in New York.
It should be further noted that such requirement would not be contrary to the general scheme of the Insurance Law with respect to the use of authorized insurers. Although N.Y. Ins. Law § 2118 (McKinney Supp. 2004), as amended by Ch. 687 of the Laws of 2003, permits, in certain situations, an excess line broker to procure insurance from an unauthorized insurer, the excess line market is intended to provide coverage only when no coverage is available from an authorized insurer. When an excess line broker desires to place business with an unauthorized insurer, the broker must comply with the provisions of N.Y. Ins. Law § 2118(b) (Ch. 687 of the Laws of 2003) and N.Y. Comp. R. & Regs. tit. 11 Part 27 (2003) (Regulation 41), which require that a diligent effort be made to procure insurance from an authorized insurer and generally permits placement with an unauthorized insurer only after the broker first obtains three declinations from authorized insurers.
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.