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Legislative Memo

518.465.7511

BILL:

S.990(Budget)/A.1920 (Budget) - Part Q

Support

SUBJECT:

Wrap-up Insurance

 

DATE:

March 7, 2005

 

The Business Council of New York State, Inc., a statewide association of more than 3,600 companies, chambers of commerce, and trade associations which employ more than one million individuals, has reviewed the aforementioned legislation and opposes its enactment.

Part Q of Budget bill S.990/ A.1920 provides for allowing centralized procurement of owner controlled (wrap-up) insurance and surety bonds by state agencies, public authorities, and construction projects in excess of $100 million. This reverses the 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.

It should also be noted that not all contractors pay the same amount in insurance premiums. Contractors with good safety records pay lower premiums, with the reverse also being true - thus affecting each company's bidding. Since bids are based in part on insurance costs, safety conscious contractors have a distinct competitive advantage as a result of the 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 coverage, double coverage, and lack of coverage will all lead to increased costs. Furthermore, 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.

Finally, the bill also provides for the wrapping of surety bonding. The bill fails to properly differentiate between the fundamentals of surety and insurance. By definition, suretyship is the process by which a promise by one party (the bonding company) becomes accountable to another party (the owner) for the dutiful and faithful performance of a third party (the 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 these reasons, The Business Council respectfully opposes adoption of Part Q of S.990/A.1920.