Surety Bond Quarterly - Spring 2016 - (Page 24)

Feature Subcontractor SURETY BONDING and DEFAULT INSURANCE The Value (and Risk) of Using Both Resources SUBCONTRACTOR SURETY BONDS BY J. BRAD ROBINSON WHEN I AM not fulfilling my obligations as the national chairman of the Construction Financial Management Association, I am employed by an international construction manager/ general contractor within the finance department. One of my responsibilities is to ensure that our subcontractors are financially sound to perform on our projects. In order to do so, we use both subcontractor default insurance (SDI) and subcontractor surety bonds. I am convinced that both are beneficial risk mitigation products if they are used in the correct manner. 24 SUBCONTRACTOR DEFAULT INSURANCE An SDI program may be attractive to a contractor because of the perception that sureties are typically slow to react to claims AND the potential for additional profit, provided that default reserves reach an acceptable level and losses are minimal. However, this lure of additional profit can be deceiving. It takes a high level of sophistication to actively manage the risk of potential subcontractor default. Best-in-class contractors typically have a function that manages the overall SDI product (enrollment, renewals, claims, etc.) and someone who assesses the financial risks of accepting the subcontractors and their capability of executing the type and size of subcontract they are entering into. My company has been quite conservative in the underwriting and prequalification of our subcontractor partners, and as such the program has been financially and operationally successful. We understand and recognize that we cannot see the same depth of information to which a surety SURETY BOND QUARTERLY | SPRING 2016 has access through due diligence and underwriting within their bond program and thus the conservatism we maintain. Committing to an SDI program is not inexpensive in terms of the quality of staffing and resources, let alone large self-retention and cosharing in losses with the SDI carrier. This is a primary reason only mid-size to large contractors, those that have loss absorption power, engage in SDI programs. If the contractor is not adequately resourced and prepared, with adequate loss funding reserves, then the outcome could be devastating. What about subcontractor bonding? My company relies on subcontractor bonds when we cannot get comfortable with the empirical data that we have obtained to underwrite the contractor. Generally, the subcontractors with whom we have had the most experience and those trades with the lowest risk of default are those we use to prequalify with SDI. For the balance, we utilize surety Continued on page 34

Table of Contents for the Digital Edition of Surety Bond Quarterly - Spring 2016

NASBP Upcoming Meetings & Events
2015-2016 Executive Committee
From the CEO – It’s Spring and a Season of Change for Surety
Practical Insights: What You Need to Know – Joint Ventures in Construction
Making a Difference: NASBP Members support Breakthrough in Trauma Treatment for Vets
Susan Hecker Recognized for Contribution to Heavy-Construction Industry
Evolving Compliance Requirements: Addressing Human Trafficking
Subcontractor Surety Bonding and Default Insurance
Managing Subcontractor Risks of Non-Performance and Financial Failure
SDI Insured Must Shoulder Burden to Pursue Claims Against CGL Policy
One Contractor’s Transfer Preference: Subcontractor Bonds
Facilitating International Commercial Surety

Surety Bond Quarterly - Spring 2016

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