The Office of General Counsel issued the following opinion on May 17, 2005, representing the position of the New York State Insurance Department.

Re: Wrap-up Policy Not Subject to Audit Adjustment

Question Presented:

May an owner or a contractor recalculate the cost of insurance premiums by increasing the credit applied to a bid to be paid by a contractor or subcontractor under a wrap-up insurance policy covering a non-public entity project when the contract between the owner or contractor and the contractor or subcontractor has a clause that the policy is subject to audit and that the premium cost will be adjusted later to reflect such actual audited figures resulting from change orders and extra work orders?


No. It is impermissible to increase the credit applied to a bid to account for an audit increase in the wrap-up insurance premium, even if the contract expressly permits such an adjustment, pursuant to N.Y. Ins. Law § 2505 (McKinney 2000).


A subcontractor was hired by a general contractor to engage in painting services at a non-public commercial building project with wrap-up insurance. There were change orders and extra work orders during the two-year policy period. After the certified payroll was submitted, the contractor recalculated the insurance premiums and charged the subcontractor additional substantial amounts based on the alleged actual amounts the insurance would have cost if based on payroll. The contract disclosed that the wrap-up policy is subject to audit. The subcontractor objects to being charged on a two-year policy period for additional premium amounts, beyond the original estimate and contractual amount due to certified payrolls submitted, change orders, and extra work orders because the project was "wrapped."


Wrap-up insurance refers to a policy, or series of policies, written to cover a specific project and insuring all of the persons and entities that work on such project.

The contract may not override the provisions of the statute, N.Y. Ins. Law § 2505 (McKinney 2000), which 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 which reflects the amount the bidding contractor or subcontractor would otherwise add if providing its own insurance.

It would violate Section 2505 for the owner or contractor to seek an after-the-fact adjustment. The owner or contractor would essentially be circumventing the statutory prohibition against being reimbursed by the contractor or subcontractor for the insurance costs when the owner or contractor purchases the insurance. Moreover, the

owner or contractor may actually receive more than reimbursement of its own insurance costs under such a method because of the cost savings usually obtained in wrap-up coverage. It is also noted that the contractor or subcontractor would not benefit if the actual insurance costs were lower than anticipated because the bid would not be adjusted in the contractor’s or subcontractor’s favor in the event that fewer man-hours were worked. Additionally, an adjustment based upon man-hours is not consistent with the usual practice for rating general liability policies.

For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.