A New York appellate court recently affirmed what we have long known; that an owner is not a beneficiary of subcontractor default insurance. In that case, the developer used a construction manager on a Manhattan hi-rise project. The construction manager had obtained Subguard coverage, but this didn’t protect the owner when the largest subcontractor, the concrete superstructure, defaulted on the job. Because of that default, the construction manager could not finish the job. It is possible that Subguard did not cover the construction manager for the sub’s default either because not all subcontractors may be qualified to be admitted into the SDI program. This left the owner in a real jam.
This is a key difference with surety bonds. A surety bond on the construction manager would have guaranteed the performance of the construction manager and protected the owner. Furthermore, a lot can be done with dual-obligee riders with bonds that can protect both owners and financial institutions. If SDI is going to be used on a project where there is no bond, and the only safety net is SDI, then the owner has the added burden of being sure which of the subcontractors will or will not be qualified under the SDI program.