Subcontractor Default Insurance
Published: 01-Aug- 2011 | Product Category: Surety
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Subcontractor default presents a high level of risk for any construction firm. Surety bonds have historically enabled contractors to transfer the risk of subcontractor failure, but are not the only way to provide this benefit.
An alternative solution is subcontractor default insurance (SDI), a first party insurance policy that indemnifies a contractor for costs incurred as a result of a default in performance of one of its subcontractors. Such costs may include both those directly related to the defaulted subcontract as well as indirect costs.
SDI may be written on a portfolio or project-specific basis, and provides a fixed dollar limit available to pay claims. The insured contractor is responsible for pre-qualification of subcontractors and for undertaking all actions to resolve or settle any loss. Insured contractors benefit from a reduction in potential losses thus keeping jobs on time and within budget, as well as more favorable pricing with their SDI programs as their sub-contractor pre-qualification processes are improved.
Managing subcontractor default is a critical part of a comprehensive risk management program. Marsh provides you with access to a highly experienced, global network of SDI and surety consultants to procure coverage alternatives for subcontractor default. We focus on helping you mitigate, manage, and reduce your total cost of risk. We provide consultative advice, program design and placement, and claims preparation and advocacy. In addition, Marsh has the ability to provide a financial benchmark service that measures financial factors to identify those subcontractors that might present a high risk of failure.
SDI provides the following:
- A first party insurance policy to respond to a default of contract by
- a subcontractor.
- A funding mechanism for subcontractor default losses.
- Control of subcontractor selection and pre-qualification.
- Ability to manage the corrective actions taken to mitigate the effects
- of a defaulted subcontractor.
- Coverage for direct and indirect costs resulting from the default of subcontractors or suppliers.
- A more direct and less time consuming process than perfecting a subcontractor surety bond claim. Multiple-year programs consisting of annual policies. With underwriter approval, an owner may be added as a scheduled entity via a financial interest endorsement which triggers in the event of insolvency of the general contractor/insured and provides the owner with rights under the policy, which can be a selling point to an owner when negotiating a project.
The Marsh team provides consultative advice to SDI clients in the following areas:
- program brokerage, implementation, and training concerning the benefits of SDI to client’s staff, project owners;
- public-private-partnership (P3) consortiums, lenders, and enrolled subcontractors;
- subcontractor prequalification processes, including financial benchmarking and scoring; and
- claim consulting services, including evaluation, document assembly, subcontract balance reconciliation, and negotiation to maximize recovery.
Advantages of SDI
SDI provides the following advantages:
- broader coverage than subcontractor bonding for indirect costs and with recovery potential up to policy limits for any default regardless of subcontractor value;
- insured contractor controls claim process when a performance default occurs;
- bonding capacity supplemented with surety dedicated limits endorsement; and
- potentially more cost effective option than subcontractor bonding.
In addition to SDI, Marsh offers a variety of consulting, loss control, and insurance services either as a part of a robust risk management program, or individually. These include:
- SubSecureSM, a financial benchmark service that measures factors to identify subcontractor default risk
- contract surety;
- owner directed surety programs, where owners sponsor surety programs for all project participants
construction consulting services, including: — project governance and performance audits
— dispute resolution and expert testimony
— insurance and default claims
- fraud monitoring and forensic investigation;
- workforce strategies and safety solutions; and
- property and casualty insurance programs.
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