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Legislative Memo

Ken Pokalsky
Director of Government Affairs
T 518.465.7511 x205
www.bcnys.org

BILL:

S.6056(Budget)/A.9556 (Budget) - Part F

Support

SUBJECT:

Wrap-up Insurance

 

DATE:

February 25, 2004

 

The Business Council of New York State, Inc., a statewide association of large and small
companies, chambers of commerce, and trade associations which employ more than one million
individuals, has reviewed the aforementioned legislation and opposes its enactment.

Part F of Budget bill S.6065/ A.9556 provides for allowing centralized procurement of owner
controlled (wrap-up) insurance and surety bonds by state agencies, public authorities and
municipalities for public projects with a total cost of $50 million and multiple related public
construction projects in excess of $100 million. This reverses long-standing tradition of having
contractor-provided insurance and surety bonds in an effort to encourage the competitive bidding
process within the construction industry to avoid fraudulent practices and increased costs.

We oppose the elimination of competition in the securement of the necessary insurance by
contractors. This bill would eliminate the contractor's ability to choose the insurance carrier they
believe would best serve their needs. Thus the contractor loses the ability to solicit insurance
from professionals that would provide the individual company the best insurance product coverage
suited to its unique situation.

In a similar vein, it should be noted that not all contractors pay the same in insurance premiums.
Contractors with good safety records pay lower premiums, with the reverse also being true - thus
effecting each company's bidding. Since bids are based in part on insurance costs, safety
conscious contractors have a distinct competitive advantage due to lower premiums. Under wrap-
up this advantage is eliminated thus reducing the incentive for contractors to maintain a good
safety record which will ultimately impact the owner's cost in the long run.

Wrap-up insurance will also cause a duplication of coverage (contractor being covered under
wrap-up and their own independent coverage), splitting of current policies (arising out of the
separation of the general liability included in wrap-up and an auto policy not included in wrap-up),
and periods of no insurance coverage (when a contractor completes a project covered under wrap-
up and must renew and subscribe to policies previously terminated), depending on how current
policies are written. Specially tailored coverages, double coverage, and lack of coverage will all
lead to increased costs. Further, since wrap-up insurance is not purchased by the contractor
there are additional concerns about services needed (by the contractor) such as claims processing
that could go under served.

Lastly, the bill also provides for the wrapping of surety bonding as well. The bill fails to properly
delineate the fundamental difference between surety and insurance. By definition, suretyship is
the process by which a promise by one party (the bonding company) becomes accountable to
another party (owner) for the dutiful and faithful performance of a third party (contractor).
Insurance is risk-sharing, surety is a form of credit. A surety underwriter investigates the
contractor to assure himself that the contractor has the ability to satisfactorily perform the
obligations being bonded. Thus, in addition to serving as a guarantee to the owner, a bond is also
an instrument of pre-qualification whereby the bonding company states to the owner that the
contractor has been examined and found to be qualified to complete the contract. This bill places
the State in the position of obtaining such bonds for those who may not normally be bondable.

For the above mentioned reasons The Business Council of New York State, Inc. respectfully
opposes Part F of S.6056/A.9556.