There’s news on the Denver market’s housing front that’s cause for both celebration and a bit of concern.
The good news is that at least 12 condominium developments containing nearly 1,200 combined units have been announced or are under way in the metro area, according to a report in the Denver Business Journal.
Two factors have helped push projects along: last year’s passage by the state Legislature of a construction-defects reform bill and the state Supreme Court’s decision upholding arbitration clauses in construction defect cases pitting home buyers against contractors and developers.
So, what’s got us passing around the worry beads?
Many contractors are still struggling to find qualified workers, project costs continue to rise, competition is fierce and owners are placing ever-increasing pressure on general contractors and subcontractors.
All of these trends, unfortunately, fuel the potential for defaults.
Subcontractors in particular are struggling to execute on their existing workloads and are often undercapitalized and unable to bond.
In other words, subs are taking on too much work too fast and are getting into financial trouble.
If you’re a general contractor, one strategy to consider in response to this is Subcontractor Default Insurance, or SDI.
SDI provides coverage to the GC should one of their subcontractors or suppliers get in over their heads and default.
Perhaps better still, a GC with Subcontractor Default Insurance can step in to react quickly to correct a problem and keep the project on track. There’s no having to wait for the sub to default, as a GC would with a surety bond in place.
Limits on these policies differ depending on the carrier, going as high as $75 million per loss and $225 million in aggregate.
The more robust policies include coverage for the costs related to correct nonconforming work, getting the job back on track quickly, and even the expenses related to claim preparation.
What’s more, some insurers will put their claims people to work alongside your team to help investigate what happened. They’ll conduct an in-depth review of project documents and develop the proof-of-loss paperwork to capture all the information needed to help resolve things as quickly as possible to minimize further delays in the project.
We don’t think SDI will ever replace traditional payment and performance bonds as a go-to option for most projects, but SDI is a good alternative to consider for large-scale construction projects. In fact, because of the added financial risk, the target market for SDI policies is large commercial and industrial contractors.
There’s more about these policies than space here allows, but we’re here to help, so don’t hesitate to get in touch with any questions.
One final point to keep in mind: Subcontractor Default Insurance is not a substitute for a payment bond. If the GC becomes insolvent or just refuses to pay its subs, the subs might have no recourse. In other words, sophisticated, in-demand subs will most likely require the GC to carry a payment bond, too.
Tom Patton is a Surety Advisor with CCIG. Reach him at TomP@thinkccig.com or 720-330-7922.
CCIG is a Denver-area insurance brokerage with the full-service capabilities of a national brokerage. We do more than make sure you have the right policy. We also help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.Back to Resources