Cotney Insurance Series Part 6 – Subguard Insurance

In our sixth and final installment in our construction insurance series, we examine “subguard” insurance, which is a relatively new product. It is designed to provide protection to contractors upon the default of their subcontractors.

Insurers will conduct an assessment of subcontractors and only provide coverage to approved providers. A contractor can rely on the insurance, subject to the appropriate deductible, to cover the cost of completing the work or supplies of the defaulting subcontractor. Unlike labour and material (L&M) bonds, subguard insurance does not protect subcontractors against the failure of owners, general contractors, or construction managers to make payments to trade subcontractors on a timely basis.

Contractors will generally have a broad policy with both a claim and an aggregate limit that applies to all the projects undertaken by the contractor. In this circumstance, a default on any project by a subcontractor will trigger the insurance coverage. Thus, owners may wish to enhance their protection by obligating contractors to purchase project-specific insurance. In addition, contractors may also carry a gap performance bond, which bonds the self-performed work undertaken by the contractor. However, in some cases, a letter of credit will be offered as an alternative to the gap bond.

While subguard insurance protection may protect the owner or lenders as an additional insured to the policy, the protection is different than that provided by a performance bond. With a performance bond, the owner calls on the surety to fix the default of the contractor which may include, in combination with the L&M bond, replacing the contractor. With a subguard and a gap bond, the owner may be required to be considerably more active in enforcing the insurance and in calling on the bond to cover the self-performed work.

As always, please reach out if you have any questions.

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