Building Stronger SDI Claims: Mitigation, Documentation and Litigation Prep

Colin Daigle (00:08):
Welcome everyone to another episode of Imperium's Risk Series, and today we're going to talk about subcontractor default insurance claims, with the focus on the growing emphasis of effectively managing defaults and then pricing and documenting the claims. I'm Colin Daigle. With me is Joe Stella. We're with Imperium Consulting Group. Our backgrounds, about 25 years in SDI claims. I'm more on the financial side, loss measurement side. Joe brings a background of construction operations, running a construction firm, legal background, all prior to consulting, and he and I have been doing SDI claims together for a number of years. Welcome, Joe. Thanks for joining me.

Joe Stella (00:51):
Good afternoon, Colin. Great to be here with you.

Colin Daigle (00:54):
Let's really focus on the high points, and we'll do this quickly, as everyone enjoys a podcast. How would you compare SDI claims today versus 10 years ago?

Joe Stella (01:04):
10 years ago, there was really predominantly just one carrier in the space. Today there's multiple carriers each with their own policy, each with their own forms and prescribed procedures to follow. It's having a greater awareness of what do the carriers today, what are they looking for. The experience that the carriers have, they're applying the lessons that they have learned over the last 10, 15, 20 years, so it's having that awareness. Then, on the subcontractor side, the defaulted subcontractors, I would say previous years, more traditionally the subcontractor was unstable or going out of business, financial insolvency. Today I think we're seeing more of the defaults lead to performance issues or come from performance issues where the subcontractor is still a viable going concern. There may be a default on this project, but that's not the end of the road for the subcontractor, which then has more implications with the claim and/or potential litigation action subsequent to the SDI claim.

Colin Daigle (02:14):
Right, and we're going to talk about that. I know going back 10 years ago or more, financial insolvency really dominated the drivers of these defaults both in economic downturns and then the recovery when subs and contractors, their balance sheets were tighter to get through a downturn and then the work ramped up and they struggled. How about some of the larger challenges on SDI claims today that we're seeing, that you see and that we hear from clients?

Joe Stella (02:41):
I think one challenge that has really always been there and for us as the claim prepare is coming in, depending on what phase we are, it's making sure the project team understands and is aware of the default-related costs and properly separating and segregating those costs aside from non-default related costs. That also leans into owner claims for delay against the general contractor and whether those delays are caused by the defaulted subcontractor or another subcontractor on the project or maybe a dispute between the contractor and the owner. On one hand, the contractor is trying to reduce their delay exposure, but they're also trying to make sure they have it properly identified and quantified within the SDI claim. In addition to that, it's managing the replacement subcontractors, making sure that they understand the scope of work, that there is proper entitlement for the scope of work that the replacement contractors are performing. Sometimes it may be existing subcontractors on-site that are doing supporting repair work, cutting and patching may not be the scope of the defaulted subcontractor, but how does that fit into the claim?

That really ties into quantifying and documenting the default-related losses, and the key component there is on a contemporaneous basis. If the costs are not properly tracked and identified on a contemporaneous basis, then the burden increases as to getting the carrier to approve those costs or having them withstand in a subsequent litigation action. Part of that again is really truly understanding what the entitlement issues are, what is the nexus to the defaulted subcontractor and discreetly tracking the cost using discrete cost codes, properly updating the schedule so you can demonstrate delay and so forth.

Colin Daigle (04:45):
Yes, I think it's interesting. The carriers will typically have a checklist, a form, a spreadsheet, a manner and a process to document a loss, and then a contractor will have its own project controls, the way it tracks and manages costs. It’s really trying to marry those two processes and sources of information. The ultimate goal is to accurately quantify it on the general contractor side, but also provide it to the carrier so that they can understand it and make a determination of coverage and quantification or loss amount.

Joe Stella (05:18):
Right. Ultimately the cost related to the default should predominantly be a black and white issue. Black and white it is a default related cost, or black and white that it does not belong. There will be some level of gray area and usually with our involvement, it's trying to minimize where that gray area is and bring clarity between both the general contractor and the carrier to get everybody on the same page so that the claim can be resolved and paid.

Colin Daigle (05:51):
Agreed.

Joe Stella (05:52):
Let me ask you a question, Colin. What do you see as an area right now that insureds should be thinking about regarding SDI claims?

Colin Daigle (06:02):
It’s interesting, there was a recent court decision in New York this year, 2025, where the decision affirmed that default had taken place, but it reduced the amount of the claim. My understanding of the case, and I'll preface it by saying we weren't there, we don't know all of the information, but there was a default and the carrier paid the insured a little more than $8 million in that loss, and then it went to an arbitration against the defaulted sub for subrogation. That subcontractor showed up and had something to say about the default and the work, as well as looking at all of the replacement sub-costs. But the result of that, through the arbitration and ultimately through the courts, the courts upheld that that $8 million loss paid by the carrier, it was reduced to about 2.5 million, and so that really brings into play everything that we're talking about. What they found was the loss was excessive. They found that the construction manager GC did not mitigate the default effectively. They found that the cost, I think the word was woefully undocumented or woefully documented, and they brought in into question a number of things. The replacement subcontractor's work was not managed effectively, and even some of the delays on the project that were attributed to the default were not believed to be caused by the default. What it makes us think about, and certainly what users of SDI should be thinking about is, it's one thing to prepare the claim and present it to the carrier, but in this world where there's financial insolvency is not necessarily the leading driver and subs are still in business and they may contest the default as that goes through a litigation process and arbitration, a subrogation, even to court, that the claim that is originally prepared really needs to be litigation ready. It goes beyond just, hey, do we have documentation for various costs? It's being able to show that the costs were reasonable, that nexus to the default, all of that. I think the last thing on that case, which again we don't know the details of it, but it's fascinating in that the carrier presumably found that the claim that was submitted was a satisfactory proof of loss or claim in terms of the damages it paid, and then those damages were later reduced by an arbiter and/or the courts. That I think is a first that I've heard of that.

Joe Stella (08:30):
Yes, and I think that's the piece for me after reading the case that was really puzzling. How could it withstand the scrutiny of the carrier, but then predominantly feel during the litigation? That goes back to what I mentioned earlier, and you said it again, presenting the claim so that you are litigation ready and realizing it's two layers of review of the claim that you present. In the review by the carrier, not that they are not stringent, but they don't have firsthand knowledge of what happened out at the project. When you end up in a litigation with a subcontractor who is still in business and is very anxious to fight and defend that claim, they're bringing to the table the knowledge of being at the site. They really have a much higher level of scrutiny or the ability to refute entitlement on certain issues or the cost of certain issues. You need to be aware of that, and that should be thought through when you're presenting the underlying claim to the carrier.

Colin Daigle (09:38):
Right, and it's effectively, it's both a subcontract, a contract claim because the default follows the contract provisions and an insurance claim, and both of those considerations need to be made as there's a plan to put that claim together. So, talking about that, what's been working well with SDI claims, what would you advise are some things to do to have a successful outcome?

Joe Stella (10:01):
First, it precedes the claim, and it's understanding the red flags when a subcontractor may be going into default. So it's properly following all the requirements of your contract when making that decision to default the subcontractor. Along with that is your, the contractor's own effective default mitigation to reduce the loss, especially knowing that you will be pursuing an SDI claim. I think where we can help, it's the early involvement to really establish loss measurement processes within the project. Typically the biggest challenge that we see if we're brought in later during the process, the segregation of costs or the tracking of the documentation, those procedures may not have been put in place in a contemporaneous manner. So, now the contractor needs to go back and say what happened six months ago, a year ago when these costs were incurred, becomes very difficult and challenging if you start to think about allocating costs or how you actually identify what was in fact related to the defaulted subcontractor. Working with the carriers, one of the first items that I always mention, is you really want to have a collaborative and a transparent process with the carrier. Again, I said it earlier, ultimately costs, they either should belong or they shouldn't belong. The more transparent you can be with that process, the more promptly your claim will be reviewed and processed, approved and paid.

Colin Daigle (11:37):
Yes, and I think it's fair to say we work for the insured side, we get retained by them, but what we look for, we are really also representing the interests of the carriers in that we want them to find the claim reasonable, and it's a fact pattern, and it's well documented, and they can make their own determination. There are occasions certainly where on a project site, a contractor's out there, they have a challenged project. An SDI claim becomes a bucket to put costs into. I think where we've gotten involved, sometimes our first conversations with clients are uncomfortable ones to say you have too much cost in there or that's not something related to the default or there's not coverage for that. We don't make those ultimate coverage determinations, but we guide them to how to apply the policy, and so we have seen some heavy-handed claim preparation efforts that preceded us and then we have to get that distilled down to what's really appropriate in the claim. 

Joe Stella (12:31):
Right, and that ties back to what we were talking about earlier, what's really changed over the last 10 years. The carriers are sophisticated as their consultants that they use. You're not going to fool them, you should not try to fool them. They understand what happens on a project, they understand what the costs are, then you need to be prepared to properly present and document what those costs are.

Colin Daigle (12:55):
Right. Wrapping this up, what does all this mean in terms of what we've talked about?

Joe Stella (13:00):
It's that proactive early involvement, managing and mitigating the default. Again, I mentioned seeing the red flag, staying on top of it. Knowing as a project team when you need to start to document the issues with this particular subcontractor. That contemporaneous documentation is so critical. You need to be on top of that early. Paying attention and understanding what the costs are, knowing that you will be challenged by the carrier and their team, whether costs are appropriate or excessive, so you need to be aware of that. Only the costs that are appropriate should be submitted as part of the claim.

Colin Daigle (13:39):
Or challenged by an arbitration panel or a court as we saw.

Joe Stella (13:42):
Even more so. Exactly. To make certain that those costs are appropriate, your decisions and the costs you compile and prepare, it should be based on an objective set of facts. If a stranger gets involved, which is typically the case, evaluate in the claim or evaluate in the litigation, are they able to see the facts the same way? Is it an objective situation?  That's what you need to have. On the claim documentation, it's ultimately having a set of documents that is litigation ready. You have to assume or expect that that's where you may end up, so are you prepared for that?

Colin Daigle (14:27):
Yes, I'd add just one last thing. As we saw from that case, again, we weren't involved in it, but where there is a subrogation effort, I think it's obviously in the general contractor or construction manager, the insured's interest, to partner with the carrier in any subrogation to present the claim that was paid and not just leave it up to an outcome that they're not involved in because of the fact that in that particular case, the panel found that the costs were excessive. Something between what was presented during the claims process and what was presented during the arbitration process resulted in the arbitrator finding that it was excessive or too much was paid. I would certainly recommend that as well, be prepared for that subrogation and to participate in that subrogation.

Joe Stella (15:15):
Yes, it's critical that the contractor is involved in that process, in ultimately protecting their rights.

Colin Daigle (15:22):
Thanks, Joe, for joining me and presenting this podcast. Thanks everyone for tuning in. You can learn more about Joe, myself and Imperium at ImperiumCG.com.