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 opinion on December 14, 2005, representing the position of the New York State Insurance Department.

RE: Wrap-up Insurance

Question Presented:

If the audit of an owner or contractor’s wrap-up insurance policy1 on a non-public construction project results in an increase in premium, is it permissible to require the hired contractor or subcontractor to increase its bid credit to account for the increase in the wrap-up insurance premium?

Conclusion:

No, it is impermissible to require a hired contractor or subcontractor to increase its bid credit to account for an audit increase in the wrap-up insurance premium, pursuant to N.Y. Ins. Law § 2505 (McKinney 2000).

Facts:

A company has bid on a non-public construction project. The sponsor of the project has purchased wrap-up insurance, the premium for which is based on payroll. The sponsor has required the company to credit its bid in the amount that the company would have had to pay for insurance had it purchased its own coverage for the project. The sponsor informed the company that the bid credit is only an estimate that may be revised after the project is completed. The project sponsor contends that the bid credit may be increased where the audit of the wrap-up insurance results in an increase in premium, to the extent that the increase is attributable to the company’s higher payrolls, and not those of the sponsor or other subcontractor. The company questions the correctness of the sponsor’s assertions.

Analysis:

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 give a project sponsor greater security against risks assumed in taking charge of a construction project. However, by making the decision to purchase wrap-up insurance, the project sponsor 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 hired contractors or subcontractors. It is of no consequence that the audit premium increase is a result of the hired contractor or subcontractor’s payroll being higher than initially calculated.

Although a project sponsor may require a bidding contractor or subcontractor to credit its bid to reflect the cost it would have borne had it purchased its own insurance for the project, it may not require the bid credit to be amended after the bid has been accepted because an increase to the credit is in effect a payment towards the wrap-up insurance premium.

Thus, it is impermissible to require a hired contractor or subcontractor to increase its bid credit to account for an audit increase in the wrap-up insurance premium, pursuant to N.Y. Ins. Law § 2505 (McKinney 2000).

Please note that a project sponsor continues to retain its civil right to seek judicial redress should it believe the general contractor or subcontractor committed fraud in the making of its bid, and nothing herein is intended to diminish such right.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.


1   “Wrap up insurance policy” 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.