The Advise & Consult blog certainly isn’t light reading — but you wouldn’t want it to be dumbed down simple. This blog, created by a business that provides expert legal witnesses, needs to be written at the level that you would find value if you were a serious lawyer or litigant in a significant construction dispute. In fact, the advice can either help you avoid problems or, if you are thoughtful, provide insights in how you structure your business and legal affairs so that if you are sued, you will be in a much better place.
(I’m not a lawyer, of course, and wouldn’t think of providing specific legal advice to anyone reading this blog. And the lawyers and experts behind Advise & Consult wouldn’t want you to make legal decisions based on their blog postings — but, heck, they are experts, so if you see something worthy of consideration, you could take it to your lawyer for review or call Advise & Consult; which of course rationally explains why they publish this blog. But that’s okay, the insights here are indeed written at a high enough level that you certainly can get the picture and only pay for proper advice when you really need that level of support.)
While some of the topics in this blog are so arcane and legally specialized I think only a person deep into construction law would find them relevant, there are others that have broader relevance, such as this post by Michael S. McNamara of Pillsbury Winthrop Shaw Pittman LLP, who discusses the distinctions between Subcontractor Default Insurance (SDI) and bonding and takes aim at a surety provider arguing against SDI.
SDI is obtained by the general contractor to protect it from subcontractor defaults—much like a performance bond or other guaranty. While the definition of a default depends on the terms of the SDI policy, it is solely based on a failure to fulfill the terms of a covered subcontract. SDI policies give contractors broad authority to determine whether a subcontractor is in default of its contractual obligations. Triggers of default are outlined in the subcontract agreement between the general contractor and the subcontractor that would include insolvency, a failure to perform, or the performance of defective work.
This relatively new option has some real advantages over traditional subcontractor performance bonds, McNamara writes.
- SDI is a two-party contract, between the general contractor and the SDI carrier; the contractor pays the premium to the SDI carrier and the subcontractor pays nothing. Surety bonds are tripartite contracts among the subcontractor (principal), surety, and contractor (obligee); the subcontractor pays the premium to the surety for a performance bond and then bills the contractor.
- Performance bonds only protect the contractor if a subcontractor commits a material breach of the subcontract, and sureties can take the position (wrongly in our opinion) that the surety need not respond until the contractor terminates the subcontract. In contrast, SDI policies typically define default much more broadly, and do not require the contractor to default terminate the subcontractor. This allows the general contractor to make a claim and without interrupting the subcontractor’s work on the project.
- SDI is “pay first, question later, if necessary.” Too often, surety bonds are “fight first, pay much later, and only if you have to.”
- My nearly two decades as a lawyer have taught me that surety bonds are really only protection against one risk: Subcontractor bankruptcy. In any other circumstance that could potentially trigger the surety’s obligation to perform, the surety’s investigation and glacial response pace will wreak havoc on a project.
Then McNamara takes aim at another lawyer’s arguments in favor of the more traditional surety subcontractor performance bonds: Who can make a claim, history, statutory requirements and pre-qualification. I’ll let you read the blog posting directly for the details but the conclusion is loud and clear.
Simply put: for nearly every project, SDI is a better product. It’s much cheaper, provides better coverage and is fast-acting—all the things that surety bonds aren’t.
Of course, there are other perspectives on this issue, and I’m sure that they have validity. The point is that the Advise & Consult blog really takes a much deeper and more thorough perspective of construction litigation and claims issues than you would generally see elsewhere. It certainly is a worthwhile resource and entry in the 2016 Best Construction Blog competition.
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