STATE OF NEW YORK
25 BEAVER STREET
NEW YORK, NEW YORK 10004
|George E. Pataki
RE: Non-public Construction Project Assessments
A general contractor ("GC") is providing wrap-up insurance coverage for a non-public construction project. The construction contract requires a subcontractor to pay an assessment to the general contractor for claims attributable to the subcontractor. Does the assessment clause violate N.Y. Ins. Law § 2505 (McKinney 2000)?
The assessment clause does not violate N.Y. Ins. Law § 2505 (McKinney 2000); however, other clauses of the contract do violate this statute.
An inquiry involved a subcontractor that was working on a non-public construction project in New York. The subcontractor was insured under the general contractors wrap up insurance program. The construction contract permited the assessment against the subcontractor for claims attributable to him under a tiered assessment structure based on the amount of work subcontracted. In the case of the subcontractor, the assessment would be $15,000 or the amount of the claim, whichever would be less, and it applied to each workers compensation and general liability claim attributable to the subcontractor.
A partial copy of the construction project contract was provided, which also stated that the subcontractors bid credit for insurance costs would be adjustable based on the final cost of the subcontractors man hours and payroll. The contract also stated that insurance costs were to be deducted for change orders, purchase orders and/or work orders that resulted in higher payroll and man hours.
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 GC 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, a construction contract may not impose the taking of additional credits from a subcontractors bid whether because the man hours and payroll are higher than the subcontractor originally estimated or because circumstances create a need for a change order, purchase order and/or work order. Such additional credits are the same as a premium charge to the subcontractor, which is prohibited under § 2505.
While the statute prohibits a GC from charging a subcontractor premium on a wrap up insurance program, the statute does not prohibit the imposition of assessment fees on claims. The assessment fees inquired about appear to be more akin to a deductible, which is not proscribed by § 2505.
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.