As with most insurance-related things, going through carriers` quotes, including understanding what`s covered and excluded in subcontractors` default insurance, can be a tricky job. For this reason, we have developed our Product Subcontractor Default Insurance (SDI). Liberty Mutual`s SDI is specifically tailored to the needs of general contractors to make any project a success. SDI ensures that general contractors retain control of their projects while protecting them from losses resulting from the failure of a subcontractor. Given the increased risk of subcontractor failure, IDS policies are likely to be even more costly as the economy recovers from the COVID-19 pandemic. Deductibles, which are already high, are likely to increase. Right now, it`s not uncommon for a deductible to be between $500,000. In addition, IDS policies have a co-payment that is paid by the entire retention – often three to five times the deductible. That said, under the right circumstances, the SDI will always have value and save money. For very large orders, it would be useful to assume some of the risk of financial default for general contractors to accept SDI`s high deductibles, as it would cost much less (now usually 50% less) than subcontractors who pass on the costs and costs in their offer. Another consideration is whether the costs can be absorbed by the project. General contractors can also use SDI strategically to target high-risk subcontractors. General contractors must be large and sophisticated enough to have the resources to adequately pre-qualify subcontractors, including assessing the financial risks associated with accepting subcontractors and tracking their schedules and performance throughout the life of the project.
While the pre-qualification process is necessary, it is not enough to carefully manage the risk. A pre-qualified subcontractor at the beginning of a project must also be managed throughout the workflow. Monitoring the performance of subcontractors by a general contractor will be even more important in the post-COVID-19 economy, as subcontractors are more likely to be operationally and financially busy. For more information on the effectiveness of subcontractors` default insurance in a recovering economy or other construction law issues, please contact Nicole Lentini and Becky Juhl. Unlike a bond, the IDS is not a guarantee of performance or payment. While a bond is an agreement between the general contractor, the subcontractor and the guarantor, SDI is exclusively a bipartite agreement between the contractor and the insurer. Cost will not be the only deciding factor in assessing the value of SDI after the pandemic. It is possible for insurers to record more exclusions in policies to manage their own risk related to the effects associated with mandatory closures, similar to those the United States has recently experienced. Therefore, it would be unlikely that the failure of subcontractors resulting from such a shutdown (including effects such as staff shortages and backlogs in the supply chain) would be covered. SDI policies also generally do not cover failures resulting from: misrepresentation, fraud, failures occurring before the insurance period, substantial breach of warranty by the contractor, contracts purchased from other companies, war and losses resulting from the provision of professional services.
Insurance policies issued by the United States and Canada. In the United States, AXA XL insurance companies are: AXA Insurance Company, Catlin Insurance Company, Inc., Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Specialty Insurance Company and T.H.E. Insurance Company. In Canada, coverage is underwritten by XL Specialty Insurance Company – Canadian Branch and AXA Insurance Company – Canadian Branch. Coverage can also be purchased by Lloyd`s Syndicate #2003. Coverages underwritten by Lloyd`s Syndicate #2003 are placed by Catlin Canada Inc. on behalf of Syndicate member #2003. Lloyd`s Ratings is independent of the AXA Group. After the COVID-19 pandemic, insurance companies will necessarily adjust their outlook on subcontractors due to the increased risk of loss. As a result, it will likely be more difficult for general contractors to find subcontractors who can pre-qualify for SDI policies, and in any case, the process will become longer. In addition to the above information, general contractors may be interested in subcontractors` business continuity plans and specific plans to mitigate impacts such as employee loss and/or project closures. Not all SDI coverages are created equal.
Simply put, SDI`s niche qualities require an expert understanding of the causes and best solutions in the event of subcontractor failure. Through rigorous research, including consultations with top general contractors, Liberty Mutual is able to offer a different – better – approach to SDI. There are now half a dozen porters doing this, and more are expected to jump on board. To reduce their risk, IDS carriers require general contractors to pre-qualify subcontractors before they can be included in the policy. General contractors are responsible for this process. To evaluate a subcontractor both operationally and financially, subcontractors must provide the following types of information: financial statements, proof of available lines of credit, security records, and history of claims and litigation. For subcontractors, the prequalification process is no different from that of warranties, except that it is carried out by the general contractor instead of a professional warranty insurer. The information contained herein is provided for informational purposes only. This is not an offer to sell or a solicitation to buy a particular insurance product. Insurance coverage in a particular case depends on the type of policy in force, the terms, conditions and exclusions of such a policy and the facts of each unique situation. There can be no assurance that specific insurance coverage would apply in the circumstances described herein. Please refer to the individual policy formulations for specific details on coverage.
AXA XL is a division of the AXA Group that offers products and services through three business groups: AXA XL Insurance, AXA XL Reinsurance and AXA XL Risk Consulting. Not all insurers operate in all jurisdictions and coverage is not available in all jurisdictions. CCIG is an insurance and surety broker in Denver with the full-service skills of a national broker. For years, Zurich Insurance Ltd was the only insurer to offer SDI in a line it called Subguard. However, this has slowly changed as other insurance companies have become familiar with the idea of offering policies that cover defaults. The SDI guideline is a tool that general contractors, prime contractors and construction managers (contractors) use to insure the risk of loss associated with the failure of their first-stage subcontractors. Contractors assume a huge risk of loss by hiring subcontractors to perform work on their projects. If a subcontractor does not comply with the terms of the contract, contractors can be negatively affected by: redesign, follow-up, project delays, increased costs and a damaged reputation.
SDI`s blended approach maximizes the benefits of risk transfer (bonding) and risk acceptance (SDI) and creates a well-managed risk management process that can positively impact a contractor`s bottom line. Subcontractor failure is already a common and costly problem for general contractors. If subcontractors do not comply with their contractual obligations, the profitability and reputation of a general contractor will be seriously affected. Effective management of subcontractor default risk is becoming increasingly important for general contractors in the post-pandemic economy. Our team of dedicated specialists provides a turnkey solution to manage the potential financial impact of a subcontractor failure and guides you through the process. Subcontractor default insurance (“SDI”) is a non-traditional insurance product that can minimize a general contractor`s losses resulting from a subcontractor`s default. .