The Fundamentals of SDI:What Every Litigator Should Know

Jennifer A. Esworthy, Esq.Principal ConsultantBrashear Construction Consulting

Greg Daily, VP Surety, SDI and TRI ClaimsXL Catlin

What is SDI?

Subcontractor default insurance is

first party coverage.

Established to transfer risk in a

similar manner to surety bonds

“Indemnifies” for a loss.

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Key Points for Construction Litigators

Understand the Subcontract and key terms, esp

as it relates to a default of

performance.

Is SDI at play? How does SDI work? What is

covered?

What are my client’s rights

and obligations under the

policy?

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Similarities between Surety and SDI

Protection from loss in the event of a default of performance.

Both typically proceed under a reservation of rights, offsetting losses with the Available Subcontract Balance

Must satisfy bond/policy conditions, ie proper default, timely notice, duty to mitigate.

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Differences Between SDI and Surety

SDI

• Two-Party Insurance Contract

• Contractor to select means and methods.

• Contractor maintains control of completion schedule.

• Reimbursement w/i 30 days of receipt of “satisfactory proof of loss”.

• Limits of insurance likely exceed subk price but large co-pay and deductible.

Surety

• Tri-Party relationship

• Surety typically controls means and methods.

• May encounter period of delay for investigation.

• Costs typically paid directly by the Surety.

• Surety’s obligation limited to the penal sum (subcontract price).

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The Insuring Agreement

“Subject to the Limits of Insurance, we will indemnify you for a Loss after application of the Deductible and Co-Payment amounts [sic] and subject to the Retention but only to the extent of a Default of performance by your Subcontractor/Supplier as respects any Covered subcontract or purchase order agreement.”

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Triggering Coverage

The Parties :

Named Insured and a Covered

Subcontract (enrolled sub)

A Default of Performance:

Was the Default Proper?

Indemnification:

Have the costs been incurred?

Definition of “Loss” under the policy?

Satisfaction of policy conditions:

NoticeCo-Pay and Deductible

Other InsuranceDuty to mitigate

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The Covered Subcontract

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• Verify that client is recognized as a named Insured under the policyNamed Insured

• Verify that the Subcontractor (or Project) is enrolled.Enrollment

• Verify that there is an executed subcontract with defined terms. If unexecuted, consider other options, bid coverage.Valid Subcontract

The Default

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• Has the Sub failed to perform obligations under the subcontract?Default

• Has the Sub been placed on Notice of Default in accordance with the terms of the Subcontract?Notice

• Has the Subcontractor asserted any defenses?Defenses

Indemnification

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• Understand how the policy defines “loss”, ie amounts paid due to the default of performance.Loss

• Policy “indemnifies” Insured for amounts paid, must have exhausted Subcontract Balance.Costs Incurred

• Payments can be made as soon as 30 days after receipt of a “satisfactory proof of loss”.Payment

Satisfaction of Policy Terms and Conditions

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• Notice of Default /potential claim vs. submission of POL

• Provide POL prior to:

• Expiration of the Statute of Limitations

• Expiration of right to seek recovery under the subcontract

• 10 years after substantial completion.

Timely Notice

• Has Insured satisfied deductible and co-pays?Deductible and Co-pay

• Has Insured satisfied duty to Mitigate?Mitigate

Covered Costs

Labor (including staff labor to supervise the defaulted

scope, hourly labor to supplement and time for

claim preparation)

Materials/Equipment

Subcontractors (Cost of completing the covered subcontract and Cost of

correcting defective work)

Unpaid VendorsLegal and professional

expenses

Indirects (Acceleration, liquidated damages,

extended general conditions)

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Indirects

Understand the sublimit and impact if there’s drawn out litigation.

Some policies include Legal and Consulting

Fees.Understand how the policy

defines “Indirect” costs. Typically includes delay

related expenses: acceleration, extended general conditions and

liquidated damages.

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Sample Claim Reconciliation

Subject to policy terms, an Insured may wish to submit costs while the work is ongoing. Interim reimbursement may be available to them.

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Submitted Documented

Original Subcontract 924,000$ 924,000$

Change Orders 9,969$ 9,969$

Revised Subcontract 933,969$ 933,969$

Paid to Subcontractor (695,663)$ (695,663)$

Available Contract Balance 238,306$ 238,306$

Additional Completion Costs

Labor (15,011)$ (14,675)$

Material (1,300)$ (1,300)$

Equipment (18,099)$ (18,099)$

Subcontractors (443,972)$ (225,222)$

Legal/Professional (54,000)$ (15,754)$

Unpaid Vendors (21,598)$ (21,598)$

Indirects (65,243)$ -$

Sum (380,917)$ (58,342)$

95% of sum if interim payment (55,425)$

Exclusions

• Where a bond has been issued, with some exceptions

• Fraud or misrepresentation

• A subcontract acquired from another entity

• Arising from a material breach on the part of the Insured

• Arising from acts of war, natural/nuclear disaster

• Arising from professional services > 50%

• Costs covered under other Insurance.

What is an “Excluded” cost under

the terms of the policy?

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Other Collectible Insurance

“This insurance shall be excess over any other valid bond or insurance furnished to You by the Subcontractor/Supplier.”

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Consider the impact of Other Collectible Insurance.Deductibles associated with other Insurance may be covered.

Take Aways

Representing GC’s

• Read the policy.

• Build a strong paper trail that tells the story.

• Provide regular updates as to changes in claim magnitude.

• Pursue multi directional strategy:

• Comply with notice provisions in subk and policy.

• Watch waiver/ SOL issues.

• Develop Mitigation strategy.

• Look for Other Insurance.

Representing Subcontractors

• Read the policy.

• Build the paper trail that tells the story.

• GC’s will control means and methods to remedy default but Insurer may pursue rights of subrogation.

• Stay involved - watch costs and consider impact of legal fees, consultants and indirects/acceleration.

• Preserve defenses.

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Recent SDI Case Law

• Waterscape Resort LLC v. McGovern, 2013 NY Slip Op 04709 (June 20, 2013).

• Pavarani Constr. Co. v. Ace Am. Ins. Co., 15 U.S. Dist. LEXIS 22579 (2015).

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