Construction Subguard Insurance Fundamentals

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April 13, 2022
Author: Lorman Education

A construction subguard insurance policy is one that compensates the contractor in charge, for both the direct as well as the indirect expenses, which have been incurred as result of the default in performance by a subcontractor. The default in performance here is defined as, the failure of a subcontractor to abide by the terms and conditions that are mentioned in the subcontractor agreement. This failure could result in huge losses to the general contractor, and the contractor may need insurance to cover such losses.

The Need for Insurance

The default of performance by the subcontractor will result in huge losses to the construction project as a whole. A subguard policy will help to cover these losses, which are caused by subcontractor defaults. In the absence of the insurance, the general contractor should make up for these losses using his own finances. This will be in accordance with the terms and conditions, which are mentioned in the performance bond of the project. With a subguard policy, this performance bond fails to stand valid. The insurance also enables the general contractor to compensate for these losses, without having to depend on his/her own funds.

Costs Covered

A subguard insurance policy covers both the direct costs and indirect costs associated with the project. The direct cost will include the costs that are required for completing the obligations of the subcontractor, the cost required for correcting the non-confirming or defective work, and the amount the subcontractor has to pay to other parties involved in the project. These costs will also include the expenditure associated with adjustment, investigation, defense of disputes, and the fees of the lawyers and consultants in the case.

The indirect costs that come under the subguard policy will include the costs of job acceleration, liquidated damages, delay costs, extended overhead costs, and the other expenses that generally tag along with the performance default of a subcontractor.

The Options

A subguard policy presents a general contractor with two different options. While purchasing the policy, the general contractor can enter into a retrospective agreement, or, he/she can purchase the insurance with a high deductible. Under the clauses of the retrospective agreement, the premium can be returned if the general contractor manages the risks of the project in a commendable manner and does not experience severe subcontractor defaults. If the option of high-deductible plan is considered, then the general contractor will be presented with a policy, which costs much less than the payment and performance bonds of the subcontractor.

The Advantages

A subguard insurance policy offers many advantages over the surety bonds that are obtained from subcontractors. Having a subguard policy eliminates the need for a surety bond in the first place. It also takes away the need for a personal agreement from the subcontractor. The policy also gives the contractor the right to default the subcontractor without actually terminating the original subcontract. This will allow the subcontractor to continue to work on the project. The subguard policy is also hugely supported by lending organizations that finance very large projects. This particular insurance policy also provides the necessary finances for covering the default by the subcontractor, which helps in completing the project on time, and within the budget that was decided beforehand.

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