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.

MATTHEW K. CASHION JR..
President,
National Association of Surety Bond Producers
Washington, D.C.