Surety Bonds
February 2002

There is an alternative to surety bonds which is default insurance. Default insurance would provide coverage for losses that would stem from a subcontractor's default, e.g., the cost to complete for a defaulting subcontractor, the cost to correct for defective and non-conforming work, the legal costs resulting from such a default, the investigation and adjustment costs, and the indirect default costs including extended overhead, job acceleration and liquidation damages.

There are many advantages to default insurance. As we know, the bonding company represents their client and the last one that they would have any obligation to the obligee. So even if we receive a bond from a subcontractor, this bond will protect us but it may take us months or years to receive payment from the Bonding Company.

Default insurance gives the general contractor more control over the sub when there is a default. The general contractor can act immediately within the terms of the contract and the law in order to make an immediate recovery of costs, to implement collections. With a surety, this could take months and you may incur additional costly delays.

This is an area that you may want to review with your insurance agent since the cost of default insurance may be equal to, or less than that, of a surety bond for many projects.

In summary, default insurance would protect the general contractor from the subcontractor's default costs even if those costs greatly exceed the dollar value of the sub's work. The cost for insurance would be part of the contract price and the premiums could be reduced if the amounts paid out are not significant. For a surety bond, the cost would always be the same whether there were any claims or not. This may be an alternative for some projects. Please give this some thought and call if you have any questions.