Surety Bond Quarterly - Spring 2016 - (Page 27)

Feature SDI Insured Must Shoulder Burden to PURSUE CLAIMS AGAINST CGL POLICY SUBCONTRACTOR DEFAULT INSURANCE (SDI) is one tool in the general contractor's risk management arsenal-particularly on larger, more complex construction projects. SDI typically does not guarantee subcontractor performance and payment as more conventional surety bonds; instead, SDI insures the project's general contractor against the added cost/risk of contractual default by a subcontractor. Most SDI policies contain high aggregate limits to insure against the added cost of subcontractor defaults on multiple projects being performed by the insured general contractor. SDI is generally not a replacement for more traditional general liability (CGL) coverage insuring against the risk of defective work. A recent federal court decision raises some concern, however, that an SDI policy may be used as a funding scheme for the insured to recover for a subcontractor's defective work claims. In allowing this approach, however, the SDI-insured is at risk for expending significant additional time and expense to recapture these funds for the SDI insurer. Pavarini Construction Co. (Se) Inc. (Pavarini) served as the general contractor on a high-rise condominium construction project in south Florida. As part of the project, Pavarini enrolled in an Owner-Controlled Insurance Program (OCIP), which provided CGL coverage. Two insurers furnished the CGL coverage-one primary and one excess-totaling $29 million in aggregate coverage. Pavarini also carried SDI with $25 million in aggregate coverage. Pavarini subcontracted portions of its work on the project. One subcontractor, Alan W. Smith, Inc. (AWS), was responsible for building the project's concrete masonry wall units with reinforced steel. Another subcontractor, TCOE Corporation (TCOE), subcontracted to install reinforcing steel within load-bearing concrete columns, beams, and shear walls. Both of the subcontractors performing this work were extended CGL coverage under the OCIP. Additionally, Pavarini's SDI policy covered it against the risk of contractual default by these subcontractors. Inspections revealed significant defective work performed by AWS and TCOE. This defective work compromised the structural integrity of BY G. SCOTT WALTERS NATIONAL ASSOCIATION OF SURETY BOND PRODUCERS | WWW.NASBP.ORG 27 http://WWW.NASBP.ORG

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