Surety Bond Quarterly - Winter 2017 - 17

a "big gamble."27 In every case when a
subcontractor defaults, there is delay
and disruption. These defaults are
less likely to occur if subcontractors
are more thoroughly prequalified by
bonding companies that have established methods and procedures. In
addition, oftentimes the subcontractor's owner(s) personally indemnify any
loss sustained by the surety under the
bond, which consequently incentivizes
the owner(s) to complete the bonded
work prior to the unbonded work.
From a risk perspective, this control
over prequalification and indemnity is
a valuable loss-prevention measure for
a surety claims professional.
Others in favor of SDI have cautioned
against making the incorrect assumption that a surety (rather than a general
contractor) will always do a better job
of assessing the subcontractor's likelihood to default. Their counter-argument is that the general contractor has
placed its own funds at risk under an
SDI program through the large deductible and co-payments. This motivates
the general contractor even more so
to ensure the subcontractor is up to
the task of timely and correctly performing its scope of work. In addition,
a general contractor may be the best
party to understand the operational
capabilities of the subcontractor.28
One construction manager that has
had success with SDI "understand[s]
and recognize[s] that [it] cannot see the
same depth of information to which
a surety has access through due diligence and underwriting within their
bond program" but ameliorates that
fact by being more conservative in its
underwriting and prequalification.29
Contractor v. Surety
Responsibilities
A performance bond mandates that
the surety has the primary obligation
to step in and remedy a subcontractor default. The surety then has various options under the bond such as
takeover, financing the subcontractor's completion of the work, or paying
the contractor/obligee. With SDI, the
insured general contractor assumes
responsibility for taking over the
project and managing the defaulting

subcontractor's obligations. While this
added responsibility may not be too
burdensome for a larger contractor that
has the resources to fill the gap, it is an
impractical expectation for mediumsized to smaller contractors to easily
replace the defaulting subcontractor.
Following a default where a surety
bond is in place, the surety pays the
loss to the contractor/obligee and in
turn seeks indemnity from the subcontractor/principal. With SDI, the insured
general contractor pays to replace the
defaulting subcontractor and then

seeks reimbursement from the carrier.
The general contractor makes a claim
on the policy, and the carrier agrees to
start paying within 30 days receipt of
documentation to back up the claim.
This means within 30 days of receipt
of evidence, the general contractor has
already paid out its deductible.30 If the
subcontractor is ultimately found not
to be in default, the proceeds paid to
the insured must be returned.31 This
process of "pay first, claim later" can
cause a significant strain on a mediumsized or smaller general contractor

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Table of Contents for the Digital Edition of Surety Bond Quarterly - Winter 2017

NASBP Upcoming Meetings & Events
2017–2018 Executive Committee
From the CEO: Looking Backward to Reach Forward
Relationships for the Long Run
Subcontractor Default Insurance: Relevant Considerations for the Surety Claims Professional
Bottom Line Protection with Job Cost Accumulation & Allocation
Inside the AIA’s New Insurance and Bonding Contract Exhibit
The Calm After the Storm: Managing Disaster Response Contracts
Practical Tools to Help Jump-Start Your Company’s Cyber Plan
Index to Advertisers
Surety Bond Quarterly - Winter 2017 - Intro
Surety Bond Quarterly - Winter 2017 - cover1
Surety Bond Quarterly - Winter 2017 - cover2
Surety Bond Quarterly - Winter 2017 - 3
Surety Bond Quarterly - Winter 2017 - 4
Surety Bond Quarterly - Winter 2017 - 5
Surety Bond Quarterly - Winter 2017 - 6
Surety Bond Quarterly - Winter 2017 - 2017–2018 Executive Committee
Surety Bond Quarterly - Winter 2017 - 8
Surety Bond Quarterly - Winter 2017 - From the CEO: Looking Backward to Reach Forward
Surety Bond Quarterly - Winter 2017 - 10
Surety Bond Quarterly - Winter 2017 - Relationships for the Long Run
Surety Bond Quarterly - Winter 2017 - 12
Surety Bond Quarterly - Winter 2017 - 13
Surety Bond Quarterly - Winter 2017 - Subcontractor Default Insurance: Relevant Considerations for the Surety Claims Professional
Surety Bond Quarterly - Winter 2017 - 15
Surety Bond Quarterly - Winter 2017 - 16
Surety Bond Quarterly - Winter 2017 - 17
Surety Bond Quarterly - Winter 2017 - 18
Surety Bond Quarterly - Winter 2017 - 19
Surety Bond Quarterly - Winter 2017 - 20
Surety Bond Quarterly - Winter 2017 - 21
Surety Bond Quarterly - Winter 2017 - 22
Surety Bond Quarterly - Winter 2017 - 23
Surety Bond Quarterly - Winter 2017 - 24
Surety Bond Quarterly - Winter 2017 - 25
Surety Bond Quarterly - Winter 2017 - Bottom Line Protection with Job Cost Accumulation & Allocation
Surety Bond Quarterly - Winter 2017 - 27
Surety Bond Quarterly - Winter 2017 - 28
Surety Bond Quarterly - Winter 2017 - 29
Surety Bond Quarterly - Winter 2017 - Inside the AIA’s New Insurance and Bonding Contract Exhibit
Surety Bond Quarterly - Winter 2017 - 31
Surety Bond Quarterly - Winter 2017 - 32
Surety Bond Quarterly - Winter 2017 - The Calm After the Storm: Managing Disaster Response Contracts
Surety Bond Quarterly - Winter 2017 - 34
Surety Bond Quarterly - Winter 2017 - Practical Tools to Help Jump-Start Your Company’s Cyber Plan
Surety Bond Quarterly - Winter 2017 - 36
Surety Bond Quarterly - Winter 2017 - 37
Surety Bond Quarterly - Winter 2017 - Index to Advertisers
Surety Bond Quarterly - Winter 2017 - cover3
Surety Bond Quarterly - Winter 2017 - cover4
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