OGC Opinion No. 08-12-02

The Office of General Counsel issued the following opinion on December 18, 2008, representing the position of the New York State Insurance Department.

RE: Bid Credits for Change Order

Question Presented:

May an owner or general contractor that has given a subcontractor a change order on a non-public construction project, which is insured under a wrap-up policy, require a subcontractor to increase the credit it applied to its bid?

Conclusion:

No. An owner or general contractor that has given a subcontractor a change order on a non-public construction project, which is insured by a wrap-up policy, may not require the subcontractor to increase the credit it applied to its bid.

Facts:

Making reference to the Insurance Department’s Office of General Counsel Opinions dated March 8, 2006 and May 17, 2005 (together, “OGC Ops. 3/8/06 and 5/17/05”), the inquirer asserted that prohibiting an owner or general contractor from requiring a subcontractor to apply additional credits to its bid upon a change order causes the owner or general contractor to assume the subcontractor’s insurance costs. The inquirer also contended that prohibiting the application of additional bid credits unfairly enriches the subcontractor, because the additional payment that the subcontractor receives for the additional work generated by the change order does not exclude insurance costs associated with the change order. He questioned whether OGC Ops. 3/8/06 and 5/17/05 reach a correct conclusion.

Analysis:

N.Y. Ins. Law § 2505 (McKinney 2006), which applies to non-public construction contracts, is germane to the inquiry. That statute provides:

(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, Insurance Law § 2505 prescribes how an owner or general contractor may purchase wrap-up insurance on a non-public construction project.

Wrap-up insurance provides an owner or general contractor 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 full cost of insuring the project because Insurance Law § 2505 prohibits the owner or general contractor from seeking premium payment or other wrap-up insurance-related charges from the subcontractors. At most, an owner or general contractor may require “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.” Insurance Law § 2505(b). Once a bid has been accepted by the owner or general contractor, the bid is closed. Thus, Insurance Law § 2505 permits a one-time-only credit.

Any additional credits applied to a subcontractor’s bid after the bid is accepted would be tantamount to the owner or general contractor charging the subcontractor a premium or other charge related to the wrap-up insurance, in violation of Insurance Law § 2505. Hence, an owner or general contractor who gives a subcontractor a change order on a non-public construction project that is insured by a wrap-up policy may not require the subcontractor to increase the credit applied to its bid. Accordingly, the Department will continue to adhere to the conclusions reached in OGC Ops. 3/8/06 and 5/17/05.

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