Subguard Benefits and Insights

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Bernard Hensley
9 years ago
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1 NORTHERN ALBERTA RISK & INSURANCE MANAGEMENT SOCIETY PRESENTS Subguard Benefits and Insights

2 About Zurich Zurich Financial Services Through our offices in more than 50 countries, approximately 60,000 Zurich employees serve our clients in more than 170 countries Our industry financial strength ratings are among the strongest: A.M. Best A+/superior; Moody's A1/stable; Standard & Poor's AA-/very strong; Fitch Ratings A+/stable Created Subguard, the Construction Industries first and largest subcontractor default insurance product Zurich Subguard Unique first party insurance policy which indemnifies General Contractors for costs associated with subcontractor default Developed in Late 1995, first program written September 1996 More than 135 accounts currently in force in Canada, US, UK and Germany More than $180 Billion in subcontract values insured to date 17 of top 20 ENR & 40 of top 50 ENR General Building Contractors Over 100 of top 255 ENR General Building Contractors

Best A+/superior; Moody's A1/stable; Standard & Poor's AA-/very strong; Fitch Ratings A+/stable Created Subguard, the Construction Industries first and largest subcontractor default insurance product

3 Subguard s role within the typical Construction Contractual Hierarchy Owner Contract General Contractor Contract Subcontractor 1. Selfinsurance 2a. Payment & Performance Bond 1. Selfinsurance 2. Payment & Performance Bond 2b. PPP Performance Bond 3. Subguard 3

Subcontractor 1. Selfinsurance 2a. Payment & Performance Bond 1.

4 The Objectives of Subguard Provide control to the project team to make immediate and effective decisions Provide a cost-effective alternative to the use of Subcontract Surety Bonds Provide broad coverage with a consistent, reliable, and long term source of payment and performance Enhance Liquidity to decrease the project cost and promote on-time, on-budget, quality projects Simplified claims processing, allowing the project team to focus on the important task of finishing the project

long term source of payment and performance Enhance Liquidity to decrease the project cost and promote on-time,

5 Control Subguard restores control back to the project by allowing the General Contractor to manage the claims (default resolution) process: Replaces three-party surety relationships with first-party relationship between the General Contractor and Zurich General Contractors manage claims efficiently without third party approval Instills non-adversarial relationship Subcontractor (Principal) General Contractor (Obligee) Surety Three Party Surety Subguard General Contractor Subcontractor Subguard First Party 5

Zurich General Contractors manage claims efficiently without third party approval Instills non-adversarial relationship

6 Control - Prequalification Zurich prequalifies all General Contractors thoroughly, and we ve developed best practices around how subcontractors are prequalified by those who use Subguard Focus area #1 Operational. Ability to analyze a subcontractor s management and ability to perform work on time and on budget Focus area #2 Financial. Ability to analyze the financial position Analysis must be consistent, frequent, and most importantly followed We offer Zurich s Technical Guidance on Prequalification to our GC s Key Facts Our data indicates improper prequalification factors in more than 50% of claims In 2004, Zurich began actively supporting development of customers subcontractor prequalification programs. Since then, the number of subcontractor defaults attributed to prequalification has declined dramatically (Peek level in 2000 = 68%, 2010 level = 9%)

Ability to analyze the financial position Analysis must be consistent, frequent, and most importantly followed We offer Zurich s Technical Guidance on Prequalification to our GC s Key Facts Our data

7 Cost Rate on Subcontracted Values Max. Subguard Cost Avg. Bond Rate Actual Loss Experience Subguard Fixed Premium Rate Default Loss $ Amount 7

8 Coverage Subguard is a 1 st party Indemnification Policy covering the General Contractor for Costs associated with subcontractor default(s) on an enrolled project Loss is not capped by the subcontract value, but rather subject to the policy limits Provides comprehensive coverage for the project term & up to 10 years thereafter Subguard provides protection against Direct Loss including but not limited to: Cost to supplement sub s work to stay on schedule Cost to terminate and replace defaulting sub Cost to replace any non-conforming work Cost to pay for any unpaid suppliers or sub/subs Cost of expenses or defense of disputes with subs (attorney s, consultants, etc) Subguard provides protection against Indirect Loss including but not limited to: Cost to GC of any liquidated damages directly related to a defaulted sub Cost for extended overhead of GC to oversee additional workforces Cost to accelerate the work (extra payments to other subs)

but not limited to: Cost to supplement sub s work to stay on schedule Cost to terminate and replace defaulting sub Cost to replace any non-conforming work Cost to pay for any unpaid suppliers or

9 Liquidity The GC is empowered to immediately address any problems associated with subcontractor and supplier default and the ability to implement a remedy to rectify As a condition of the policy, Zurich is required to make payment within 30 days of acceptable proof of loss. The median average in 2011 was 25 days, and our goal is to continue to improve this result Subguard was founded on the philosophy that Construction Projects are complex journeys, and when faced with a challenge which could delay or deter the journey the party best suited to lead the way to a successful completion is the General Contractor

The median average in 2011 was 25 days, and our goal is to continue to improve this result Subguard was founded on the philosophy that Construction

10 Claims Historically, under Subguard the average cost to complete the original scope of work for a defaulted subcontractor is 220% of the original contract amount Subguard example amounts paid on large losses: $4.6 M - Cabinetry (Insolvency) $13.5 M Electrical (Insolvency - Change of Ownership) $10.4 M - Façade restoration (Poor performance - Schedule) $8.9 M Electrical (Poor performance Schedule) $4.5 M - Curtainwall (Poor performance - Schedule) $6.6 M Interior tile (Poor performance Quality) $8.5 M Cabinetry (Poor performance Quality) $12.5 M Structural (Poor performance Multiple) $30.3 M Steel Erector (Insolvency)

4 M - Façade restoration (Poor performance - Schedule) $8.9 M Electrical (Poor performance Schedule) $4.5 M - Curtainwall (Poor performance - Schedule) $6.

11 Claims Process 1. Subcontractor default occurs 2. General Contractor incurs loss 3. Payment / Doc preparation 4. Proof-of-loss submitted 5. Zurich reimburses

12 Subguard Services to Benefit the Construction Industry Dedicated in house Risk Engineering Team with an average of 24 years experience in construction and an average of 7 years within Subguard Specially designed team which completes the initial due diligence to ensure acceptability into the program, continued service throughout the project, claims coordination, and audit functions. Periodic site visits to your project by to provide insights into trends, lessons learned, scheduling assistance, and subcontractor oversight Dedicated in house Claims Team with an average of 8 years of Subguard Experience Recovery/subrogation experts used on all claims, substantial recoveries received to date, all activities coordinated with the General Contractor to ensure alignment of interest Consultative assistance prior to a default, strategic planning to ensure best result

Periodic site visits to your project by to provide insights into trends, lessons learned, scheduling assistance, and subcontractor oversight Dedicated in house Claims Team with an average of 8 years

13 Summary Subguard is a risk management tool Returns control of the project to the contractor Offers a cost-effective solution Broad, consistent and efficient coverage Liquidity, promotes on-time and on-budget projects Quick and Comprehensive claims approach

Broad, consistent and efficient coverage Liquidity, promotes

14 THANK YOU FOR ATTENDING THE NORTHERN ALBERTA RISK & INSURANCE SOCIETY SESSION # For a copy of this presentation, please visit NARIMS website at northernalberta.rims.org PLEASE REMEMBER TO SIGN OUT WHEN YOU LEAVE!!!!

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