{"id":887515,"date":"2016-03-09T06:55:32","date_gmt":"2016-03-09T13:55:32","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=887515"},"modified":"2016-03-08T15:34:38","modified_gmt":"2016-03-08T22:34:38","slug":"subcontractor-default-insurance-a-modest-rebuttal","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/subcontractor-default-insurance-a-modest-rebuttal\/","title":{"rendered":"Subcontractor Default Insurance &#8211; A Modest Rebuttal"},"content":{"rendered":"<p>Michael S. McNamara | Pillsbury Winthrop Shaw Pittman LLP | March 1, 2016<\/p>\n<p><a href=\"https:\/\/www.myconstructionexpert.com\/blog\/2-subcontractor-must-pay-for-general-contractor-defense-including-its-litigation-mistakes-after-ignoring-general-contractors-tender-under-express-indemnity-provision\/\" target=\"_blank\">Subcontractor default insurance<\/a> (SDI) was created more than twenty years ago. Despite its relatively recent vintage, SDI is now offered by multiple insurers and is quickly replacing traditional subcontractor payment and performance bonds as a go-to option on large-scale construction projects. SDI has many benefits that surety bonds don\u2019t.\u00a0We\u2019ll be going into this in substantial detail at our Fourth Annual Subcontractor Default Insurance Forum that Pillsbury co-presents, along with our friends at Willis Towers Watson, in Scottsdale in May.<\/p>\n<p><a href=\"https:\/\/www.myconstructionexpert.com\/blog\/u-s-district-court-hawaii-holds-claims-arising-contractors-failure-provide-metal-framing-installation-drywall-raise-occurrence-insurance-polic\/\" target=\"_blank\">SDI<\/a> is obtained by the general contractor to protect it from subcontractor defaults\u2014much like a performance bond or other guaranty. While the definition of a default depends on the terms of the SDI policy, it is solely based on a failure to fulfill the terms of a covered subcontract.\u00a0SDI policies give contractors broad authority to determine whether a subcontractor is in default of its contractual obligations.\u00a0Triggers of default are outlined in the subcontract agreement between the general contractor and the subcontractor that would include insolvency, a failure to perform, or the performance of defective work.<\/p>\n<p>During the lead-up to that meeting, an<a class=\"logclick ct_cont\" href=\"http:\/\/djcoregon.com\/news\/2015\/11\/20\/op-ed-protections-against-subcontractor-defaults\/\" target=\"_blank\">\u00a0Op-Ed piece by C. Andrew Gibson<\/a>, an attorney at Stoel Rives LLP, caught my eye.\u00a0The title of the article speaks volumes. In the early years of SDI, it would have been unthinkable for a surety bonding stakeholder to acknowledge that SDI had any place whatsoever in the construction industry.\u00a0But despite having a semblance of balance, Gibson\u2019s article still takes some of the positions that the surety bonding industry has taken over the years.\u00a0So, we wanted to respond to some of them.<\/p>\n<p>But first, let\u2019s cover the basics\u2014the fundamental differences between SDI and surety bonding.<\/p>\n<ul>\n<li>SDI is a two-party contract, between the general contractor and the SDI carrier; the contractor pays the premium to the SDI carrier and the subcontractor pays nothing. Surety bonds are tripartite contracts among the subcontractor (principal), surety, and contractor (obligee); the subcontractor pays the premium to the surety for a performance bond and then bills the contractor.<\/li>\n<li>Performance bonds only protect the contractor if a subcontractor commits a material breach of the subcontract, and sureties can take the position (wrongly in our opinion) that the surety need not respond until the contractor terminates the subcontract. In contrast, SDI policies typically define default much more broadly, and do not require the contractor to default terminate the subcontractor. This allows the general contractor to make a claim and without interrupting the subcontractor\u2019s work on the project.<\/li>\n<li>SDI is \u201cpay first, question later, if necessary.\u201d Too often, surety bonds are \u201cfight first, pay much later, and only if you have to.\u201d<\/li>\n<li>My nearly two decades as a lawyer have taught me that surety bonds are really only protection against one risk: Subcontractor bankruptcy. In any other circumstance that could potentially trigger the surety\u2019s obligation to perform, the surety\u2019s investigation and glacial response pace will wreak havoc on a project. Now that we have that out of the way, let\u2019s turn to the Op-Ed piece.<\/li>\n<\/ul>\n<p><strong>Who can make a claim<\/strong><\/p>\n<p>The Op-Ed piece says that only the general contractor can make a claim on an SDI policy; the owner can\u2019t. That\u2019s not entirely true. SDI carriers offer endorsements that provide protection to owners as well. One of Pillsbury\u2019s biggest SDI recoveries was based on a financial interest endorsement that protected the owner.<\/p>\n<p><strong>History<\/strong><\/p>\n<p>Gibson says that surety bonds have been around for millennia. Exactly! Surety bonds are from the Stone Age. The implication that they are better because they are older is misplaced. The market has spoken on <a href=\"https:\/\/www.myconstructionexpert.com\/blog\/unique-look-at-one-of-the-newest-aspects-of-construction-defect-coverage-and-a-broker-warning\/\" target=\"_blank\">SDI<\/a>: It\u2019s accepted. Again, our broker friends are better-positioned to comment on that, so look for a guest piece on this blog from Willis. For my part, I\u2019ll say this: The surety industry says bonds\u00a0<em>have<\/em>\u00a0history. I say they\u00a0<em>are<\/em>\u00a0history. Okay, not quite, but they will be.<\/p>\n<p><strong>Statutory requirements<\/strong><\/p>\n<p>Gibson says that surety bonds are required on certain public projects. That\u2019s absolutely true\u2014for the general contractor in favor of the owner. SDI protects the general contractor against subcontractor defaults.<\/p>\n<p><strong>Prequalification<\/strong><\/p>\n<p>Gibson notes that sureties prequalify subcontractors. Ah, prequalification&#8230;<\/p>\n<p><a href=\"http:\/\/www.lexology.com\/library\/detail.aspx?g=76992789-4c65-4a3b-ae4e-0b800795a0f4&amp;utm_source=Lexology+Daily+Newsfeed&amp;utm_medium=HTML+email+-+Body+-+General+section&amp;utm_campaign=Lexology+subscriber+daily+feed&amp;utm_content=Lexology+Daily+Newsfeed+2016-03-03&amp;utm_term=\" target=\"_blank\">To finish reading this article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Michael S. McNamara | Pillsbury Winthrop Shaw Pittman LLP | March 1, 2016 Subcontractor default insurance (SDI) was created more than twenty years ago. Despite its relatively recent vintage, SDI is now offered by multiple insurers and is quickly replacing traditional subcontractor payment and performance bonds as a go-to option on large-scale construction projects. SDI&hellip; <a class=\"more-link\" href=\"https:\/\/www.myconstructionexpert.com\/blog\/subcontractor-default-insurance-a-modest-rebuttal\/\">Continue reading <span class=\"screen-reader-text\">Subcontractor Default Insurance &#8211; A Modest Rebuttal<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[14,9,3],"tags":[9123],"class_list":["post-887515","post","type-post","status-publish","format-standard","hentry","category-construction-2","category-construction-contracts","category-insurance-claims","tag-subcontractor-default-insurance","entry"],"jetpack_publicize_connections":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Subcontractor Default Insurance - A Modest Rebuttal - Advise &amp; 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