Surety Bond Quarterly - Winter 2017 - 23

ENDNOTES
1 Subguard™ is the most prevalent type
of SDI, created by Zurich Financial
Services. Throughout this paper the
terms will be used interchangeably.
2 Terry Gray, Point/Counterpoint;
Default Insurance-An Alternative
to Traditional Surety Bonds, 22
WTR CONSTRUCTION LAW 17
(2002); Andrew Zimmerman,
Carl Bloomfield & Shane Riccio,
Contractor Default Insurance: A
Nuanced Alternative to Performance
Bonds (May 10, 2013), http://www.
grahamco.com/KnowledgeCenter/
whitepapers/nuanced-alternativeto-performance-bonds/.
3 State ex rel. Am. Subcontractors Ass'n,
Inc. v. Ohio State Univ., 950 N.E.2d
535 (Ohio 2011); CONSTRUCTION
BRIEFINGS No. 2012-3.
4 Id.
5 Anna H. Oshiro & Michael S.
Zicherman, Hard Hat Case Notes,
CONSTRUCTION LAW (Fall 2011) at 43.
6 Michael S. McNamara, Subcontractor
Default Insurance - A Modest Rebuttal,
GRAVEL2GAVEL CONSTRUCTION
LAW BLOG (Mar. 1, 2016), http://
www.gravel2gavel.com/2016/03/
subcontractor-default-insurancemodest-rebuttal.html.
7 One area of law of which a surety
claims professional should always be
aware is whether there is a potential
of punitive damages in an active or
pending construction dispute. Because
SDI is viewed as traditional two-party
insurance, there is an implied covenant
of good faith and fair dealing that
subjects an insurer to potential bad
faith claims and punitive damages. By
contrast, several jurisdictions, including
California, have developed case law
under which sureties cannot be held
liable for bad faith refusal to pay and
delay in processing claims under the
reasoning that the surety's obligations
to its principal are distinguishable
from an insurer's obligations in the
traditional insurance context. See Cates
Constr., Inc. v. Talbot Partners, 21 Cal.
4th 28, 41 (1999). This insulation from
bad faith claims and accompanying
punitive damages should not be
underrated. Litigating these claims is
often time consuming and expensive
for all involved.
8 Susan L. McGreevy, Working
on a Subguard Project: Loss of
Protection for Subcontractors©
(2006), https://higherlogicdownload.
s3.amazonaws.com/NASBP/c1d78960916e-4da6-9bcd-6cd3d50b3ab7/
UploadedImages/Industry/
WorkingOnASubguardProject.pdf.

9 Andrew Zimmerman, Carl
Bloomfield & Shane Riccio,
Contractor Default Insurance: A
Nuanced Alternative to Performance
Bonds (May 10, 2013), http://www.
grahamco.com/KnowledgeCenter/
whitepapers/nuanced-alternativeto-performance-bonds/.
10 Lowell J. Notebloom, Subguard®
Subcontractor Insurance-What is
it? Is it an appropriate alternative
to surety bonds? (2001), http://
www.lorman.com/resources/
an-alternative-to-performance-bondsadvantages-and-disadvantages-ofsubcontractor-default-insurance-forthe-general-contractor-15813.
11 A recent federal court decision raises
some concern that an SDI policy
may be used as a funding scheme
for the insured to recovery for a
subcontractor's defective work claims.
Pavarini Constr. Co. (Se) Inc. v. Ace
Am. Ins. Co., 161 F. Supp. 3d 1227
(S.D. Fla. 2015). The Pavarini court
recognized a key distinction between
risks covered under CGL insurance
and those covered under SDI. The
CGL insured the owner and general
contractor and covered subcontractors
"against the risk of claims of property
damage and bodily injury" while the
SDI insured the general contractor
"against the risk of subcontractor
contractual default." Id. The decision
left open the question of whether
SDI should cover a subcontractor's
defective work.
12 Andrew Zimmerman, Carl
Bloomfield & Shane Riccio,
Contractor Default Insurance: A
Nuanced Alternative to Performance
Bonds (May 10, 2013), http://www.
grahamco.com/KnowledgeCenter/
whitepapers/nuanced-alternativeto-performance-bonds/.
13 Subcontractor Default Insurance
vs. Performance Bonds: Do You
Know the Difference? General
Insurance Services, http://www.
genins.com/img/~www.genins.com/
commercial%20lines%20articles/
subcontractor%20default%20
insurance%20vs.%20performance%20
bonds%20do%20you%20know%20
the%20difference.pdf.
14 Id.
15 This endorsement to the SDI policy
often provides the owner access to
the policy only in the event of general
contractor insolvency. Otherwise,
the owner's only recourse is under
its direct contract with the general
contractor or through a general
contractor's surety. Douglas Schrift,
Subcontractor Default Insurance:
Markets, Myths and Misconceptions,
Contractor Default Insurance, IRMI

CONSTRUCTION RISK CONFERENCE
(Nov. 10, 2015), https://www.
irmi.com/docs/default-source/
crc-handouts/2015-crc-handouts/
subcontractor-default-insurancemarkets-myths-and-misconceptions.
pdf?sfvrsn=8.
16 Another endorsement entitled an
Owner's Assignment Endorsement
can provide that the SDI is assignable
only in the event of the insolvency of
the construction manager.
17 Douglas Schrift, Subcontractor
Default Insurance: Markets,
Myths and Misconceptions,
Contractor Default Insurance, IRMI
CONSTRUCTION RISK CONFERENCE
(Nov. 10, 2015), https://www.
irmi.com/docs/default-source/
crc-handouts/2015-crc-handouts/
subcontractor-default-insurancemarkets-myths-and-misconceptions.
pdf?sfvrsn=8.
18 Susan L. McGreevy, Working on a
Subguard Project: Loss of Protection
for Subcontractors© (2006), https://
higherlogicdownload.s3.amazonaws.
com/NASBP/c1d78960-916e4da6-9bcd-6cd3d50b3ab7/
UploadedImages/Industry/
WorkingOnASubguardProject.pdf.
19 Peckar & Abramson, An Alternative
to Performance Bonds--Advantages
and Disadvantages of Subcontractor
Default Insurance for the General
Contractor (Apr. 30, 2014), http://www.
lorman.com/resources/an-alternativeto-performance-bonds-advantagesand-disadvantages-of-subcontractordefault-insurance-for-the-generalcontractor-15813.
20 Pavarini Constr. Co. (Se) Inc. v. Ace
Am. Ins. Co., 161 F. Supp. 3d 1227
(S.D. Fla. 2015).
21 Id.
22 The best use of an SDI policy required
the insured to be large and wellorganized, have high annual dollar
volume in subcontractors, have
relationships with trusted trade
subcontractors, and readiness to
self-insure before "real" coverage is
available for a loss. Id.
23 Managing Subcontractor Risks of
Non-Performance and Financial
Failure: A Flash Guide to Subcontract
Bonds and Subcontractor Default
Insurance, SURETY BOND
QUARTERLY (Spring 2016), NASBP,
http://suretyinfo.org/?wpfb_dl=172.
24 See Susan L. McGreevy, Working on
a Subguard Project: Loss of Protection
for Subcontractors© (2006), https://
higherlogicdownload.s3.amazonaws.
com/NASBP/c1d78960-916e4da6-9bcd-6cd3d50b3ab7/
UploadedImages/Industry/
WorkingOnASubguardProject.pdf.

NATIONAL ASSOCIATION OF SURETY BOND PRODUCERS | WWW.NASBP.ORG

23


https://www.irmi.com/docs/default-source/crc-handouts/2015-crc-handouts/subcontrator-default-insurance-markets-myths-and-misconceptions.pdf?sfvrsn=8 http://www.grahamco.com/KnowledgeCenter/whitepapers/nuanced-alternative-to-performance-bonds/ http://www.grahamco.com/KnowledgeCenter/whitepapers/nuanced-alternative-to-performance-bonds/ http://www.lorman.com/resources/an-alternative-to-performance-bonds-advantages-and-disadvantages-of-subcontrator-default-insurance-for-the-general-contrator-15813 http://www.lorman.com/resources/an-alternative-to-performance-bonds-advantages-and-disadvantages-of-subcontrator-default-insurance-for-the-general-contrator-15813 http://www.grahamco.com/KnowledgeCenter/whitepapers/nuanced-alternative-to-performance-bonds/ http://www.grahamco.com/KnowledgeCenter/whitepapers/nuanced-alternative-to-performance-bonds/ https://www.irmi.com/docs/default-source/crc-handouts/2015-crc-handouts/subcontrator-default-insurance-markets-myths-and-misconceptions.pdf?sfvrsn=8 https://www.irmi.com/docs/default-source/crc-handouts/2015-crc-handouts/subcontrator-default-insurance-markets-myths-and-misconceptions.pdf?sfvrsn=8 https://higherlogicdownload.s3.amazonaws.com/nasbp/c1d78960-916e-4da6-9bcd-6cd3d50b3ab7/uploadedimages/industry/workingonasubguardproject.pdf http://www.gravel2gavel.com/2016/03/subcontrator-default-insurance-modest-rebuttal.html http://www.gravel2gavel.com/2016/03/subcontrator-default-insurance-modest-rebuttal.html http://www.lorman.com/resources/an-alternative-to-performance-bonds-advantages-of-subcontrator-default-insurance-for-the-general-contrator-15813 http://www.lorman.com/resources/an-alternative-to-performance-bonds-advantages-of-subcontrator-default-insurance-for-the-general-contrator-15813 http://www.grahamco.com/KnowledgeCenter/whitepapers/nuanced-alternative-to-performance-bonds/ http://www.grahamco.com/KnowledgeCenter/whitepapers/nuanced-alternative-to-performance-bonds/ http://www.genins.com/img/~www.genins.com/commercial%20lines%20articles/subcontrator%20default%20insurance%20vs.%20performance%20bonds%20do%20you%20know%20the%20difference.pdf http://www.genins.com/img/~www.genins.com/commercial%20lines%20articles/subcontrator%20default%20insurance%20vs.%20performance%20bonds%20do%20you%20know%20the%20difference.pdf http://www.suretyinfo.org/?wpfb_dl=172 https://higherlogicdownload.s3.amazonaws.com/nasbp/c1d78960-916e-4da6-9bcd-6cd3d50b3ab7/uploadedimages/industry/workingonasubguardproject.pdf https://higherlogicdownload.s3.amazonaws.com/nasbp/c1d78960-916e-4da6-9bcd-6cd3d50b3ab7/uploadedimages/industry/workingonasubguardproject.pdf https://higherlogicdownload.s3.amazonaws.com/NASBP/c1d78960-916e-4da6-9bcd-6cd3d50b3ab7/uploadedimages/industry/workingonasunguardproject.pdf https://higherlogicdownload.s3.amazonaws.com/NASBP/c1d78960-916e-4da6-9bcd-6cd3d50b3ab7/uploadedimages/industry/workingonasunguardproject.pdf http://WWW.NASBP.ORG

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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