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Look at Surety Bonds
I appreciated the
description of both sides of the default insurance issue in
your article, "Subcontractor Default Insurance Gains
Attention in Tougher Times" (ENR 4/14 p. 56). As president
of the National Association of Surety Bond Producers, I would
like to provide additional comments.
Default insurance often is marketed
as "a substitute for surety bonds" when it really
is an insurance product with all the characteristics associated
with it, such as co-payments, deductibles and limits on the
insurer’s obligations. A default insurance policy is
not "the same as a surety bond," and in most aspects
it doesn’t even resemble a surety bond.
One of the most significant deficiencies
of default insurance is that it shifts responsibility for
prequalification from the surety to the owner or the general
contractor, whichever is purchasing the policy. This means
the insured is responsible for gathering financial information
and determining which contractors and suppliers are acceptable.
Default insurance may not pay for losses if "appropriate"
qualification is not performed.
Few generals and even fewer owners
have the staff and capability of providing prequalification
services. With surety bonds, prequalification is the responsibility
and obligation of the bond producer and the surety and is
a vital protection offered by the surety process.
Some claim that default insurance
is a cost-saving measure if losses don’t occur. In our
opinion, that is a big gamble and an even bigger risk. Others
claim it’s particularly useful because it has broader
subcontractor coverage than surety bonds and even covers the
default of very small subs that might not qualify for a surety
bond. Our response is that this is one more reason to have
a third party, the surety, involved to prequalify subs and
suggest ways to mitigate problems early so a claim situation
may be avoided.
With default insurance, subcontractors
and suppliers have no payment protection. The policy covers
only the insured and provides the latitude to issue a default
and immediately replace a defaulting subcontractor. A subcontractor
deemed in default has no avenue to dispute the allegation.
NASBP maintains that the default
insurance product currently on the market doesn’t measure
up to the protection and assurance afforded by surety bonds.
Default insurance is still being tested, and we’ve yet
to see how it responds when significant losses occur or the
courts get involved in settling disputes. Until such information
is available, our association continues to believe that the
betting of an owner’s or general’s dollars on a
program yet unproven is a risk better left untaken.
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