New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following informal opinion on November 8, 2005, representing the position of the New York State Insurance Department.

Re: Wrap-up Insurance

Questions Presented

1. For a public construction project where the contractor provides wrap-up insurance, may the wrap-up insurance include a provision requiring a subcontractor to share the cost of the insurance?

2. If there is a nonpublic construction project, and the contractor who provided wrap-up insurance on such project, discovers that based upon a subcontractor’s historical insurance cost data, the subcontractor failed to accurately reflect the cost that the subcontractor would have incurred had he or she purchased his or her own insurance, may the contractor adjust the subcontract price to reflect what the correct amount that the sub-contractor’s credit should have been?

3. In question number two above, if a subcontractor admits that he or she made a mistake in calculating the credit, may the credit be adjusted accordingly?

Conclusions

1. Possibly; the answer depends on exactly what type of public construction project is being discussed. Generally, N.Y. Ins. Law § 2504 (McKinney’s 2000) prohibits wrap-up insurance contracts for public construction contracts; however, if the public construction project comes within one of the exceptions cited in N.Y. Ins. Law § 2504 (McKinney’s 2000), then there are no prohibitions against executing wrap-up insurance contracts and the contractor may require the subcontractor to share the cost of the insurance.

2. No, pursuant to N.Y. Ins. Law § 2505 (McKinney’s 2000), a contractor or subcontractor may not change the amount of credit that a contractor or subcontractor used in its bid for a nonpublic construction project.

3. No, pursuant to N.Y. Ins. Law § 2505 (McKinney’s 2000), a contractor or subcontractor may not change the amount of credit that a contractor or subcontractor used in its bid for a nonpublic construction project.

Facts

No facts were provided.

Analysis

Wrap-up insurance refers to an insurance policy, or series of policies, written to insure all of the individuals and entities that work on a specific construction project. N.Y. Ins. Law § 2504 (McKinney’s 2000) and N.Y. Ins. Law § 2505 (McKinney’s 2000) are the applicable statutes.

N.Y. Ins. Law § 2504 (McKinney’s 2000) N.Y. is entitled: "[d]esignation of particular insurer, agent or broker for insurance in certain public construction contracts". N.Y. Ins. Law § 2504 (McKinney’s 2000) 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.

N.Y. Ins. Law § 2505 (McKinney’s 2000), is entitled: "[d]esignation of particular insurer, agent or broker for construction contracts generally", applies to non-public construction projects. N.Y. Ins. Law § 2505 (McKinney’s 2000) states:

(a) In any building or construction contract bid, negotiated or executed 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.

In summary, N.Y. Ins. Law § 2504 (McKinney’s 2000) prohibits wrap up insurance contracts for public construction projects; however, there is a list of exemptions from this rule. If a public construction project falls within one of the exemptions listed in N.Y. Ins. Law § 2504 (McKinney’s 2000), then N.Y. Ins. Law § 2504 (McKinney’s 2000) does not prohibit wrap-up contracts for the project. Furthermore, the Department has previously held that if a public construction project falls within one of the exemptions listed in N.Y. Ins. Law § 2504 (McKinney’s 2000), then N.Y. Ins. Law § 2505 (McKinney’s 2000) does not apply to any of those listed exempted public construction contracts. Accordingly, the contractor may require the subcontractor to share the cost of the insurance. (Office of General Counsel Opinion, May 20, 1997).

Pursuant to N.Y. Ins. Law § 2505 (McKinney’s 2000), a contractor or subcontractor may not change the amount of credit that a contractor or subcontractor used in its bid for a nonpublic construction project. N.Y. Ins. Law § 2505 (McKinney’s 2000) provides that in any building or construction contract bid, other than a public construction contract governed by Section 2504, 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 any owner or other contractor. Section 2505(b) states that the owner or contractor is not prohibited from providing all the insurance policies or surety bonds required by the contract without reimbursement from the contractor or subcontractor, or from requiring the contractor or subcontractor to include a credit in its bid that reflects the amount the bidding contractor or subcontractor would otherwise add if providing its own insurance. N.Y. Ins. Law § 2505 (McKinney’s 2000) was intended to establish a balance between the owner or contractor on the one side and the contractor or subcontractor on the other.

Thus, while a general contractor of a non-public construction project may purchase wrap-up insurance to cover a subcontractor working on the project for losses arising therefrom, the general contractor is prohibited from charging the subcontractor for the premium or other related charge on the wrap-up insurance. The general contractor may, however, require a bidding subcontractor to provide a credit on its bid, which reflects the premium the subcontractor would have paid had it purchased its own insurance for the project.

N.Y. Ins. Law § 2505(b) (McKinney’s 2000) specifies that a credit to a bid may be applied. The statute does not allow for any substitutions in place of credit application. Therefore, a general contractor that is purchasing "wrap-up" insurance for a non-public construction project may not require a bidding subcontractor to submit payment, in lieu of providing a credit in its bid, in the amount that the subcontractor would have to pay if the subcontractor were to purchase its own insurance. Furthermore, pursuant to N.Y. Ins. Law § 2505 (McKinney’s 2000), a contractor or subcontractor may not change the amount of credit that a contractor or subcontractor used in its bid for a nonpublic construction project.

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 (McKinney’s 2000) prohibits such costs from being passed on to the subcontractors.

In conclusion, If there is a nonpublic construction project, and the contractor who provided wrap-up insurance on such project discovers that based upon a subcontractor’s historical insurance cost data, the subcontractor failed to accurately reflect the cost that the subcontractor would have incurred had he or she purchased his or her own insurance, pursuant to N.Y. Ins. Law § 2505 (McKinney’s 2000), a contractor or subcontractor may not change the amount of credit that a contractor or subcontractor used in its bid for a nonpublic construction project. Or, if a subcontractor realizes that he or she made a mistake in calculating the credit, pursuant to N.Y. Ins. Law § 2505 (McKinney’s 2000), a contractor or subcontractor may not change the amount of credit that a contractor or subcontractor used in its bid for a nonpublic construction project.

For further information one may contact Senior Attorney Susan A. Dess at the New York City Office.