OGC Op. No. 08-07-22
The Office of General Counsel issued the following opinion on July 28, 2008, representing the position of the New York State Insurance Department.
RE: Assessment Clause in Construction Project Contract
Do the issues raised in an inquirer’s letter dated December 4, 2007 (“December 4th letter”) warrant reversal of the Insurance Department’s Office of General Counsel Opinion dated March 8, 2006 (“OGC Op 3/8/06”), which concludes that an assessment clause of a non-public construction project did not violate New York Insurance Law § 2505 (McKinney 2000)?
No. The issues raised in the December 4th letter do not warrant reversal of OGC Op 3/8/06.
The assessment clause at issue in OGC Op 3/8/06 required the general contractor to pay the following amounts on claims attributable to the subcontractors:
|Subcontractor Value||Liability Assessment|
|$1,000,000 - $3,000,000||$25,000|
|$200,000 - $999,000||$15,000|
|$50,000 - $199,000||$10,000|
|$1 - $49,000||$5,000|
In OGC Op 3/8/06, the Department’s Office of General Counsel concluded that the assessment clause was lawful because Insurance Law § 2505 does not prohibit claims-based assessments. The Department further opined that the assessment fees were akin to a deductible, which are not proscribed by Insurance Law § 2505.
An inquirer asserted, in his December 4th letter, that the conclusion reached in OGC Op 3/8/06 about the assessment clause should be reversed because:
1) The bid credit authorized by Insurance Law § 2505 does not contemplate a subcontractor paying a claims assessment or insurance deductible. Therefore, a bidder subject to an assessment clause may, in effect, pay “premium” in contravention of Insurance Law § 2505;
2) A subcontractor must hire legal counsel if he wishes to defend himself from a charge made by the general contractor that a claim is attributable to the subcontractor. Had the subcontractor obtained his own insurance, rather than participate in the wrap-up coverage, the subcontractor’s policy would provide legal defense against a claim of negligence at no additional fee;
3) OGC Op 3/8/06 does not address the maximum assessment that a general contractor may apply. A general contractor thus could require a subcontractor to pay the entire amount of a claim attributable to the subcontractor, making coverage under the wrap-up policy meaningless for the subcontractor;
4) Assessments reduce a general contractor’s incentive to hire a safety consultant because the subcontractor assumes the liability for damages.
The Department is sympathetic to the policy issues raised in the December 4th letter, but the Department is constrained to adhere to the text of the governing statute, and nothing in Insurance Law § 2505 suggests that assessment clauses of the sort about which were inquired are unlawful. Insurance Law
§ 2505 reads as follows:
(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.
Thus, pursuant to Insurance Law § 2505, a subcontractor may not be required to pay premium or related charges on a wrap-up insurance policy that was purchased by a general contractor, but the subcontractor may be required to provide a bid credit to reflect the premium he would have paid if he had purchased his own insurance. A general contractor may not apply additional credits to a subcontractor’s bid, because doing so after the bid has been accepted is analogous to charging additional premium. However, an assessment clause in a construction project contract alerts the subcontractor to the possibility of paying assessments, and the subcontractor can adjust his bid accordingly. Alternatively, a subcontractor may choose not to bid on the construction project if he finds the assessment clause objectionable.
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.