The Office of General Counsel issued the following opinion on November 3, 2005, representing the position of the New York State Insurance Department.
Re: Construction Bid Credit Applied for Insurance Cost
May a general contractor or owner require a subcontractor to alter the credit it applied to its bid for a non-public construction project, whether the alteration results in an increase or decrease in credit?
No, a general contractor or owner may not require a subcontractor to alter the credit it applied to its bid for a non-public construction project, whether the alteration results in an increase or decrease in credit, pursuant to N.Y. Ins. Law § 2505 (McKinney 2000). However, should a wrap-up insurance audit result in a return premium to the general contractor or owner, there is no statutory prohibition that would prevent the sharing of such return premium with a subcontractor.
The managing director of the risk management services division of an insurance broker that operates nationwide provided a summary of what was described as the credit process normally employed for wrap-up insurance1 in such brokers office. The managing director inquired about acceptable practices in New York, questioning whether a subcontractor may be required to alter its N.Y. Ins. Law § 2505 bid credit based on unforeseen or changed circumstances after the bid had been accepted by the general contractor or owner. Two such circumstances were presented: when the subcontractors payroll is less than what he or she anticipated when the bid was submitted, and when there is a "change order," which the managing director stated changes the scope of the work to be done. It was not stated whether a new contract is created with a change order or whether a new bidding process is employed. For the purposes of this opinion, we assume herein that no new or additional bidding process takes place upon a change order.
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.
This statute provides the opportunity to purchase wrap-up insurance on non-public construction projects, which generally gives a general contractor or owner greater security against risks assumed in taking charge of a construction project. However, by making the decision to purchase wrap-up insurance, the purchaser assumes the risk of the policy audit resulting in additional premium because N.Y. Ins. Law § 2505 prohibits such costs from being passed on to the subcontractors.
Thus, N.Y. Ins. Law § 2505 does not authorize a general contractor or owner to require the alteration of the credit applied by a subcontractor to its bid for a non-public construction project, whether the alteration results in an increase or decrease in credit, and regardless as to whether results are different than what was anticipated when the bid was submitted.
However, should the wrap-up insurance audit result in a return premium to the general contractor or owner, there is no statutory prohibition that would prevent the sharing of such return premium with the subcontractors.
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.