Zurich North American sells Subcontractor Default Insurance policies under the product name Subguard®. When people are referring to such insurance, they often call it a “Subguard® Policy”. Subguard® provides first party insurance coverage to general contractors to provide insurance coverage to indemnify general contractor for direct and indirect costs associated with a default of performance by subcontractor on a project. Subguard® policies cover costs of
correcting defective or non-conforming work and payment to third parties as well as delay costs, liquidated damages and extended overhead and other such expenses associated with the default of performance by a subcontractor on a project.
To even qualify for a Subguard® policy, a general contractor has to have substantial assets. Subguard® policies are generally written on an occurrence basis.
With a Subguard® policy, the need for subcontractors’ performance and payment bond is eliminated. With a Subguard® policy, there is a prequalification process that applies wherein subcontractors’ financial information and project histories are evaluated and typically a general contractor is going to hire a sub that the general contractor has experience with and has the financial ability to complete the work which eliminates new subs being hired on such projects. The disadvantage of this is that the owner will typically be paying more for the project because the subcontracts are limited as to the bids as the entity has to pass the prequalification standards. A Subguard® insurance policy does not cover third party claims. It is first party coverage only, and the insured is the general contractor.
The advantages of Subguard® are that if there is a default by a subcontractor, the general contractor can step in and perform the work and provide Subguard® with a 30-day written notice. The general contractor will then present proof of loss, and Subguard® will indemnify the general contractor within 30 days of receiving the proof of loss as long as the proper documentation is presented to support the claim. Under a Subguard® policy, once the subcontractor is in default, the subcontractor cannot continue working on the project. This is usually governed by a covenant and warranty stated in the policy.
A payment bond typically applies coverage for one year after a project is substantially completed on a private job and under the Subguard® policy, it provides coverage for latent defects caused by a defaulting contractor for 10 years after substantial completion.
A Subguard® policy will pay to remedy liens and to correct defective work of the contractors, subcontractors and suppliers. Subguard® policies do not cover claims for bodily injury or claims related to material breach of warranties.
The typical cost of a Subguard® policy is 1.33% of the subcontract amounts.
The Subcontractor Default Insurance (“SDI”) or Subguard® policy is not a substitute for a payment bond if the general contractor becomes insolvent or refuses to pay subcontractors/ suppliers on a project. The SDI policy reimburses the general contractor for payments made as a result of subcontractor’s default on the project. Only a general contractor can make a claim under a Subguard® policy. Thus, for the SDI policy to apply, the general contractor must perform the subcontractor’s work upon default or pay a sub-subcontractor and/or supplier for monies owed from the defaulting subcontractor. Two scenarios typically govern. The first scenario is when a general contractor needs the services of the supplier who was not paid for work on the project and/or the sub-subcontractor/supplier has filed a lien and the owner is forcing the general contractor to satisfy the lien under an indemnity provision in the contract between the general contractor and the owner.
The Subguard® policy does not protect the owner from default by the general contractor. If the general contractor defaults in performance of its contract, the indemnity provision between the parties will be in place but no insurance to cover the claim. If the default arose out of workmanship not covered by the general contractor’s general liability policy, there most likely will be a denial of coverage under the CGL policy. Thus, in order for an owner to protect itself against the insolvency of the general contractor, the owner should require the general contractor to obtain a payment and performance bond naming the owner as the obligee.
In deciding what insurance is right for a particular project, you should consult with your insurance agent and attorney and read the coverages and/or exclusions being provided in the respective policies and/or bonds applicable to the project. Since almost all contracts contain an indemnification provision, you want to minimize your company’s exposure to a claim not covered by insurance. If you are being added on another person’s and/or company’s insurance policy as an additional insured, you want to make sure it is on a primary, non-contributing basis, and you want to verify the exclusions in your general liability policy and under “Other Insurance” to see when each policy is primary and/or excess and under what circumstances. Coordinating the insurance coverage and the contract provisions requires the combined effort of your insurance agent and attorney to maximize the coverage and benefits you receive for the premiums that you pay.
Jessica L. Papazian-Ross, Esq. practices law at Visconti, Boren & Campbell Ltd. in Providence, RI.
