SDI Newsletter Fall 2024 - How to Improve the Claims Customer Experience: Demystifying Challenges of the SDI Claims Process

Subcontractor Default Insurance (SDI) carriers often encounter frustration from their insured partners with respect to the claims process, which in turn leads to frustration from the insureds. The frustration typically arises because the distribution of funds often requires multiple proof of loss submissions, which can be time-consuming. Providing complete evidence is especially challenging when the project is ongoing, as many costs are not realized until after project completion and the team is in an “all-hands-on-deck” environment to get project needs met. It should be noted that it is rare for claims to be resolved and paid out during the first proof of loss submission, and that navigating the claims process can be challenging for both clients and carriers. Below are some general tips regarding the SDI claims process. It is not intended to be all encompassing of everything that may be provided to or requested by an SDI carrier as evidence of a reimbursable cost.

Hudson is here to reimburse you for the costs you incur and pay due solely to the default of a covered subcontractor. To get reimbursed, a proof of loss submission with appropriate backup for all loss amounts being claimed is required. It’s a common misconception that simply entering numbers into a spreadsheet with a copy of an invoice will result in a reimbursement check. Industry standards mandate that thorough and accurate backup documentation be provided. (Most common are transactional documents such as agreements, invoices, cancelled checks and narratives.) Insureds typically won’t receive reimbursement for covered costs until all backup has been reviewed and verified as solely attributable to the defaulted subcontractor. From the onset of the default, ensure you keep detailed records of all communications, contracts and project progress.

How to Improve the Claims Customer Experience: Demystifying Challenges of the SDI Claims Process

SDI Newsletter | FALL 2024

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Maintain Clear and Detailed Records

Always remember that your carrier partner did not live and breathe the project and circumstances leading up to the default, nor are they managing through it like your project team is. Because of this, it is paramount that you paint the whole picture and tell the story. To accomplish this, your carrier will look to you to provide narratives, along with the contemporaneous documentation. These narratives can be one or two paragraphs long and can sometimes be the difference between receiving reimbursement for a particular cost or receiving additional inquiries. In short, narratives are an important part of the evidence necessary to prove that a cost is reimbursable under the policy.

Tell the Whole Story (Narratives Help!)

Time and Materials (T&M) contracts are often used for replacement contractors tasked with completing the work of a defaulted subcontractor. These contracts are particularly useful when the full scope of work is not yet fully determined. While T&M contracts are easy to deploy, they are often discouraged as an ultimate completion approach since they don’t easily allow one to control costs and maintain accuracy of the scope of work being completed. It’s suggested that they be used as a temporary solution while working to fully identify and procure a lump sum replacement option. Submissions often include documentation for costs (e.g., cleanup, miscellaneous materials, unknown labor tasks) that make it unclear that the work being performed is a reimbursable cost under the policy. If reviewers cannot determine that the costs are solely attributable to the defaulted subcontractor, it will likely result in additional questions and delayed payments.

T&M Work

An SDI policy typically allows the insured to choose between verifying exact indirect costs or using a percentage of direct costs related to the claim. Indirect costs may include (but are not limited to) liquidated damages, extended general conditions, delay damages, certain legal fees, and generally any covered cost that is not directly attributable to the defaulted subcontractor’s scope of work. The choice between percentage and actual costs is up to the insured. If the option to submit actual indirect costs is chosen, this can require more effort from the insured. Generally, the carrier will request this election (percentage vs actual) during the first proof of loss submission, though this may vary. Note that once the election is made, it usually cannot be changed.

Indirect Costs

GC partners have the flexibility to manage claims and submit proofs of loss according to the policy terms and a timeline that suits their needs, the business and the project. The status of the project, trade subcontractor involved, amount of available balance in the defaulted subcontractor’s contract, etc. can all be factors in how the insured might manage the proof of loss submissions. If timely reimbursement is crucial, it is advisable to establish a regular and consistent schedule for proof of loss submissions. The policy typically requires that the carrier provide a response to a proof of loss submission within 30 days of its receipt. In many instances submitting on a regular cadence can help ensure that reimbursements are received consistently and at regular intervals. It’s suggested that you DO NOT wait until the completion of the project for your first proof of loss submission. Historically, project documentation and recall after the closure of a project becomes problematic, as the project team disbands to new projects or other responsibilities and the parties left attempting to submit and reconcile the loss do not have the knowledge necessary to provide support.

Timely and Consistent Submissions

Effectively managing a construction project alone is difficult enough. Managing a claim in addition to the ongoing project can put significant strain on the project team. In our experience, claims are best managed when the insured provides a dedicated resource to managing the claim (someone knowledgeable in company protocols, ERP, etc.). We understand that this can come with an added cost (potentially reimbursable as an indirect cost as a part of the claim) but having available resources to focus on the required timelines, documentation and contemporaneous backup allows for more timely and thorough submissions, resulting in more timely reimbursements.

Dedicated Resource

When a claim is initiated, carriers often provide claims training sessions or mock walk-throughs to help insureds grasp the process, challenges and best practices. It’s beneficial to utilize any customer support services offered by Hudson, as we can provide valuable guidance to enhance the claims experience. Remember, the relationship with the GC partner is crucial to the carrier, and we aim to be a valuable resource for you.

Utilize Available Resources/Trainings:

We believe it would be beneficial to establish some expectations and best practices around the Hudson process. We have outlined key strategies to improve the claims journey (if and when one occurs!):

When using T&M contracts, it is important to include the following:

Detailed contract terms, including agreed-to labor and material rates Not-to-exceed clauses that can be tracked against Clear, legible and consistent timekeeping Clearly defined tasks as they relate to the claim to include contemporaneously kept daily time tickets for each employee that clearly states the tasks they are performing and hours worked Delivery tickets and invoices for material delivered to the site

It goes without saying, the best way to navigate the claims experience is to avoid it altogether! Things happen, but the cornerstone to any SDI program is strong foundational subcontractor selection and management processes/procedures. Trust your process, heed the results and limit the need for exceptions.