Surety Bond Quarterly - Winter 2017 - 22

continued from page 18

the policy language and governing law
and use express, specific terms in any
assignment, cautiously assigning SDI
policy benefits only, not obligations.
Subrogation Rights
Surety bonds are issued upon receipt of
consideration in the form of an indemnity agreement that provide that the
surety is a secured creditor for all losses
the surety sustains by reason of having issued the bonds. The agreement
grants the surety subrogation rights in
various interests such as proceeds from
the bonded contracts. An SDI policy
dictates that the insurer has a right to
subrogation against a defaulting subcontractor. The insured general contractor is prohibited under the policy
from taking any action that would interfere with the carrier's rights of recovery
against any party responsible for the
loss. These subrogation rights, though
similar, are not competing in that the
insurer maintains its ability to recover
its losses from a defaulting subcontractor while a surety has its rights against
the principal insured by virtue of an
indemnity agreement.
Length of Investigation Period
After a claim has been made on the
performance bond following a subcontractor's default, there is always a
period of investigation during which
the surety determines whether or not
the claim has merit.40 That investigation
period is necessary to ensure a default
has actually occurred, but it has the
potential to cause project delays and
cost overruns.41 Under an SDI policy,

the general contractor decides the best
way to remedy the default situation
without any input from the carrier. 42
General contractors and construction
managers in the industry may favor
this ability to proceed without having to
wait for a determination from the thirdparty surety. In short, the investigation period may be faster because the
general contractor is free to proceed
with the work while simultaneously
submitting the claim to its carrier. One
contractor advises surety claims professionals who wish to compete with
SDI need to work against the "perception that sureties are slow to respond
to a claim under the remedies afforded
by the bond."43

Coverage Cancellation/
Voided Coverage
Once a surety bond is executed, it
remains in force and may not be cancelled (even for non-payment of premium) without consent of the obligee.
Conversely, coverage under SDI may
be voided or cancelled if certain underwriting procedures are not followed or
incorrect information provided. Thus,
even with an SDI policy, reimbursement
by the insurance carrier is not necessarily guaranteed. All of the policy's terms
and conditions must be complied with,
the insured has to maneuver around
exclusions, and the policy is limited by
its overall loss limits and the fact that it
is often project-specific.

Coverage/Protection Period
A surety bond continues to provide protection against legitimate performance
and/or payment bond claims until: (1)
the time for filing suit has expired (as
stipulated in the bonded agreement);
or (2) the relevant statute of limitations
expires. SDI policies are generally written as "claims-made" policies, meaning any claims must be made during
the policy period (usually one calendar year). The policy period depends
on the policy language at issue, and
while some policies permit claims for
a period of up to 10 years after project
completion, such is not the norm. One
effect of a claims-made policy is that,
if defective workmanship not discovered until after the policy expires or
is cancelled, those claims may not be
covered. In that way, although SDI is
advertised as providing coverage for
the cost of correcting defective work,
there are clear limitations.

Conclusion
The reputation of increased cost for
bonds and lengthy investigation process involved in bond claims upon a
subcontractor's default has allowed
the introduction of SDI into the marketplace in lieu of traditional surety
bonds. While this alternative may
be viable and even successful for
the small minority of larger general
contractors on a private project with
the resources and reserves to hedge
against the significant risk of subcontractor default, SDI is not likely to be
a replacement for traditional surety
bonds any time soon.
●

The Creativity, Flexibility,
and Service You Deserve
From a Surety Partner

22

BOND QUARTERLY | WINTER 2017

Rebecca Glos is a partner in the
surety group at Watt, Tieder, Hoffar &
Fitzgerald, who provides a full range
of litigation services in all aspects of
construction and surety law. She can
be reached at rglos@watttieder.com
or 949.852.6700.
Amanda L. Marutzky is an associate
in Watt, Tieder, Hoffar & Fitzgerald's
Irvine office. She focuses her practice
in the areas of commercial litigation,
construction contract disputes, surety
and lending law. She can be reached
at amarutzky@watttieder.com or
949.852.6700.

www.granitere.com
1-800-440-5953
SURETY
692336_Granite.indd
1

An earlier version of this article was
presented at the Western States
Surety Conference (April 21, 2017) in
Seattle, WA.

5/4/14 7:44 AM


http://www.Granitere.Com http://www.granitere.com

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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