Construction

A new development in the UK/Europe

The economic recession has placed many contractors in a precarious position with their subcontractors. This issue has been highlighted in the UK which has seen a steady increase in awareness of Subguard over the last 18 months. Subguard protects Main Contractors against subcontractor default, and it is important to understand that the default is not just restricted to insolvency.  Performance, quality and programme issues are also covered.

Many contractors view Subguard as an alternative to subcontract bonds. A bond will typically provide protection up to 10% of the subcontract value.  This is low level protection and will be of little comfort when faced with a substantial default. There are substantial retentions, such as £1M per loss, but the indemnity available in excess of this figure can be as much as £25M.

The difference is clear.  For a comparable cost the Main Contractor is purchasing a substantial level of protection for a catastrophic loss, which is not available utilising bonds. In fact the bond amount could be viewed as protecting the manageable or attritional default cost.

Subguard also comes with other benefits, such as transferability to the Building Contract Employers, who will benefit from the policy in the event of a Main Contractor insolvency.  It is for this reason, tied to the six year period of cover post completion, that it has sparked interest with property developers in the UK.  The policy could effectively provide a form of latent defects insurance in the event that the Main Contractor and its supply chain were to become insolvent.

In order to qualify for the Subguard programme the Main Contractor must conduct a stringent due diligence of subcontract procurement processes and this also provides some independent validation of risk management standards in its supply chain management.
The benefits of Subguard are clear as it provides:

• Greater cover than bonds and at a similar price.
• A long period of cover.
• Transferability

However it is only available from Zurich and the product will need to meet strict due diligence criteria.

Awareness amongst employers means that Subguard is gaining traction in the UK market.  It seems that Subguard is here to stay so Main Contractors would do well to explore it!

For more details on Subguard or to see if you can purchase this cover please contact David Cahill.