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Sub-contractor default

- Subguard™

Every responsible contractor takes steps to manage its exposure to sub-contractor default. In the UK main contractors seek financial risk protection by requiring sub-contractors to provide performance bonds, typically 10%-20% of sub-contract value.

This means at least 80%-90% of the sub-contractor insolvency risk is retained by the main contractor. In practice, the financial consequence of the insolvency could be much higher, as the bond is applied to the value of the sub-contract which may be disproportionate to the disruption caused.

Subguard™, a policy underwritten by Zurich Insurance, offers the main contractor protection against the consequences of any contract default (not just insolvency) by a sub-contractor or supplier.

JLT became the first insurance broker to place this type of insurance in the UK during the first quarter of 2009.  Whilst Subguard has been available in the USA since 1996 it was only introduced in the UK and Europe during the latter part of 2008.

Our unique insight into the underwriting process

The underwriting process starts with a review of the subcontractor selection procedures, with a view to agreeing a criteria upon which the insurance is based. Zurich does not intervene to forbid use of specific sub-contractors (as may be the case with traditional credit insurance), but relies on the main contractor abiding by the agreed criteria. Subcontractors nominated by employers that do not meet the contractors usual criteria can be discussed on an ad hoc basis.

Our involvement with the first ever Subguard insurance placement in the UK provides JLT with a unique insight into the product and the underwriting process. This "hands on" experience will help you to streamline the insurance buying process, to explain the benefits of Subguard to stakeholders (internal and external) and to achieve coverage enhancements.

Some examples of heads of loss covered and principal exclusions are shown below. If you would like further information then please speak with David Cahill:

Example of Loss Covered	Principal Exclusions
The costs of completing any unfulfilled subcontractor or supplier obligations - including costs related to subcontractor / supplier replacement	Existing defaults at inception of the policy
The costs of rectification of defective or non-conforming work or materials	Dishonest or fraudulent acts
Third party payments for which the subcontractor is responsible	Subcontracts transferred to main contractor from another entity
The costs of project acceleration	Breach of policy warranties and covenants
Overheads	Nuclear and war risks
Liquidated damages	Rendering or failure to render professional services by the main contractor or the subcontractor.  This exclusion does not apply to normal supervisory duties of the main contractor nor any subcontract where less than 50% of the subcontract value represents professional services
Legal expenses	Bodily injury