1. Presented By: John D. Miller 9-27-2007
Subguard Update
Presented By:
John D. Miller

2. Subguard® Update: Program Changes
Subcontracts over $40M excluded going forward subject to approval by Zurich
Zurich must approve all projects with duration over 36 months
Notification on all subcontracts over $20M must be provided by Insured
$150M aggregate exposure on any one Insured per year
Pricing levels increasing 15–30%
Retention levels increasing 15–30 %
Notice to proceed triggers coverage

3. Subguard® Update: The Surety Audit
*One major surety is conducting audits on their clients implementation of Subguard®
“Yes or No” answers and comments are documented by the surety in the following audit areas:
-Account management / documentation
-Financial and banking documentation
-Work Program Documentation
-Risk factors pertaining to the subcontractor

4. The Product: Target Customer
Rolling Programs
General Contractors and/or CM’s at risk
Annual subcontract values of $150M or greater
Contractor or CM
Has an appetite for risk
Exhibits strong subcontractor control
Is financially strong
Contractor Controlled Programs: CCIP fits well

5. Why was Subguard® Created?
Provides consistent and efficient coverage
Puts control of subcontractor default risk in the hands of the Insured
Acts as a cost effective solution to mitigate subcontractor default risk
Moves the claims process forward at the control of the Insured and their insurer

6. Coverage: Simple Structure
One Set of Limits
Up to $50 million per occurrence
Up to $150 million total
Deductible
Co-payment
Retention Aggregates
Annual
Multi-year

7. The Product: Insuring Agreement
Covers loss due to “Default of performance by (your) Subcontractor / Supplier as respects any covered Subcontractor or Purchase Order Agreement”
Subject to limits of insurance
After application of the deductible and co-payment

8. The Product: Definitions
Covered Subcontractor / Supplier
Enrolled during policy period
Premium paid
Coverage in excess of “other” insurance
Does not apply to bonded subcontractor / suppliers
Covered Subcontract or Purchase Order Agreement
Executed during policy period
Default of Performance
Failure of Subcontractor / Supplier to fulfill terms of covered subcontract or purchase order agreement

9. The Product: Definitions (cont’d)
Covered loss means the costs and expenses paid by (you) to the extent caused by a default of performance of a covered Subcontractor / Supplier – less the unpaid balance of the Subcontract / Purchase Order including retention or recovery
Direct Costs
Completion of Subcontractor / Supplier’s obligation under the Subcontract / Purchase Order
Payment of amounts due to third parties under Subcontract / Purchase Order
Cost of correcting defective or non-conforming work
Legal and other professional fees
Costs, charges and expenses paid to investigate, adjust and defend disputes of loss
Multiple defaults by the same Subcontractor on one or more subcontracts are considered a single loss

10. The Product: Definitions (cont’d)
Indirect Costs – Not limited to:
Liquidated damages
Job acceleration
Extended overhead
Proof of Loss
Written description
Copy of Subcontract / Purchase Order
Default notice
Any other supporting evidence
Terrorism
Covered via “TRIA” (Terrorism Risk Ins. Act)
Otherwise Excluded

11. The Product: Exclusions
Bonded Subcontractor / Supplier
Pre-existing defaulted Subcontractor / Supplier
Insured’s dishonesty, fraud, omission or intentional misrepresentation
Transferred Subcontract / Purchase Order – unless agreed by carrier
Breach of warranty of covenant (not absolute)
3rd Part Bodily Injury
Nuclear events
War
Insured’s professional services (not an E&O policy)
$40 million, or greater, subcontract or purchase orders

12. The Product: Deductible and Co-Payments
Amount of each loss borne by the insured
Co-Payment
Applies after application of the deductible
Average annual retention aggregate: $1.6 million
Average 3 year retention aggregate: $2.7 million

13. The Product: Claims History
350 claims are outstanding
Average claim size $1,034,000
Average indemnity from Zurich $888,000
Subcontractor prequalification is a question on over 50% of Subguard claims
Cost to perform replacement work is almost 2 times the original value of the subcontract
The largest claims have a significant rework component

14. Subguard: Claims Process
Subcontractor
default occurs
Insured Incurs loss
Payment / Doc.
Preparation
Proof of Loss
Submitted
Zurich Reimburses
Subcontractor defaults according to terms of
contract with insured
Written notification submitted to Zurich “as
soon as practicable”
Insured works to mitigate risk and prevent
loss

15. Subguard: Claims Process
Subcontractor
default occurs
Insured Incurs loss
Payment / Doc.
Preparation
Proof of Loss
Submitted
Zurich Reimburses
Due to contract default, Insured incurs direct
and indirect costs
Insured expends monies to maintain schedule and complete / correct Subs work

16. Subguard: Claims Process
Subcontractor
default occurs
Insured Incurs loss
Payment / Doc.
Preparation
Proof of Loss
Submitted
Zurich Reimburses
Insured prepares written documentation to
support loss incurred as a direct result of
Subcontractor’s default
Zurich Construction Consultants available to
consult on required documentation.

17. Subguard: Claims Process
Subcontractor
default occurs
Insured Incurs loss
Payment / Doc.
Preparation
Proof of Loss
Submitted
Zurich Reimburses
No pre-approval required by Zurich on
replacement subcontractor
Insured maintains control and flexibility to
manage project effectively
Can be submitted as costs are incurred and paid
Up to 10 years after substantial completion of the
covered subcontract / purchase order

18. Subguard: Claims Process
Subcontractor
default occurs
Insured Incurs loss
Payment / Doc.
Preparation
Proof of Loss
Submitted
Zurich Reimburses
Zurich RE reviews proof of loss, requests additional information
as necessary
Zurich RE provides Subguard® Claims Dept. with report based
on review of Insureds proof of loss
Zurich reimburses within 30 days of acceptable proof of loss
Process could include multiple payments up to 95% until net
amount of loss is ascertained
Zurich assumes subrogation

19. Subguard®: Customer Service Plan
Enrollment Process
Zurich Service Team
Rollout Presentations
Site Visits
Actual Service Plan
Presentation / Lessons Learned / Loss Reduction
Premium Reconciliation
Claims Reporting and Handling
Documenting the claim
Electronic Claims Notification
Claim Reconciliation

20. Risk Management First, Risk Transfer Second
Standard form of subcontract agreement
Limit scope to “agreed” prior to award
Schedules of value
Partial and final lien waivers
Check status of work prior to payment
Obtain inventories and bills of sale for stored material
Check subcontractors’ progress against schedule weekly
Monitor second and third tier subs for payment
Issue joint checks where needed
Conduct post project subcontractor evaluations