Subcontractor Default Insurance (SDI): An Alternative for General Contractors

From a subcontractor’s point of view, Subcontractor Default Insurance (SDI) can be both an opportunity and a challenge. Here’s how subcontractors might view SDI:

1. What is SDI for Subcontractors?

Subcontractor Default Insurance (SDI) is a risk management tool that general contractors use to protect themselves against the financial loss that could occur if one of their subcontractors defaults on a project. Unlike surety bonds, which involve a three-party agreement (the subcontractor, general contractor, and a surety), SDI is a two-party agreement between the general contractor and the insurance provider. The subcontractor is not directly involved in this agreement but may feel its impacts.

2. Impact on Subcontractors:

  • Prequalification Process:
    Subcontractors working under an SDI policy typically undergo a rigorous prequalification process. General contractors scrutinize the subcontractor’s financials, past performance, and ability to deliver on their contracts. This process can be more detailed than that required for traditional surety bonds, meaning subcontractors need to have their books in order and a proven track record of performance.
  • Pressure to Perform:
    Since SDI allows general contractors to take swift action if a subcontractor defaults, subcontractors may feel increased pressure to meet deadlines and quality standards. If the subcontractor underperforms or delays the project, the general contractor can declare a default and bring in a replacement more quickly than with a traditional surety bond process.
  • Potential to Build Relationships:
    On the flip side, subcontractors who can meet the stringent prequalification requirements may see SDI as an opportunity to build strong relationships with large general contractors. Those who consistently perform well under SDI can potentially gain access to more projects and establish themselves as reliable partners.

3. No Surety Bond Requirement:

For subcontractors, one immediate benefit of working on an SDI-covered project is that they typically do not need to purchase a performance or payment bond, which can be costly and time-consuming. This can lower barriers to entry, particularly for subcontractors who may have trouble obtaining surety bonds due to financial constraints or other issues.

4. Faster Dispute Resolution:

With SDI, if a subcontractor defaults, the general contractor takes control of resolving the default. This can mean a quicker resolution for the project, but subcontractors may lose control over the situation. Unlike surety bonds, which offer some protection for subcontractors through a neutral third party (the surety), SDI leaves the decision-making solely in the hands of the general contractor.

5. Limited Financial Recourse for Subcontractors:

Under a surety bond, subcontractors who complete work can often recover unpaid amounts from the surety if the general contractor defaults. However, with SDI, the subcontractor has no recourse against the insurance policy. SDI only protects the general contractor, meaning subcontractors must rely entirely on the general contractor for payment and dispute resolution.

6. Risk of Replacement:

If a subcontractor is unable to perform to the general contractor’s expectations, the general contractor has more leeway to replace them swiftly without a lengthy claims process. This creates a risk for subcontractors, as they are less protected under SDI than they would be under a surety bond system, where the surety company would handle the resolution and possibly offer more protection.

7. More Flexibility for GCs:

Since SDI gives general contractors greater flexibility in managing subcontractors, subcontractors might be expected to adapt to the general contractor’s preferences and project management style more than in a bonded project.


In Summary:

From a subcontractor’s point of view, SDI can:

  • Increase scrutiny during the prequalification process, making it harder for smaller or less-established subcontractors to be selected.
  • Provide opportunities to work on larger projects without having to post a bond.
  • Put pressure on subcontractors to maintain performance standards due to the risk of swift replacement by the general contractor.
  • Eliminate the safety net that surety bonds provide to subcontractors in case of payment disputes.

SDI presents both opportunities for subcontractors who can meet the demands and challenges of working under stricter performance expectations.


For a General Contractor, What is Subcontractor Default Insurance?

Subcontractor Default Insurance (SDI) is a two-party agreement between a general contractor and an insurance company. In the event a subcontractor defaults, SDI ensures the insurance company covers the losses incurred, including both direct and indirect costs. This insurance option has become a popular alternative to traditional performance or payment bonds.


Key Features of SDI for General Contractors

  • Revenue Requirement: Suitable for general contractors with annual revenues of $50 million or more.
  • Comprehensive Coverage: Covers all subcontractors on a project or annually for all projects.
  • Indirect Loss Coverage: Includes liquidated damages and other indirect losses.
  • Project Focus: Targets private projects, not publicly bid ones.
  • Flexible Pricing: Negotiable rates, though costs are increasing due to market conditions.
  • Policy Term: Typically lasts 3-5 years.
  • Higher Deductibles: Due to increased claim activity, deductibles are larger.
  • Liability Limits: Defined by the general contractor based on the total value of subcontracts.
  • Common Claims: Can include construction defects, unpaid subcontractor balances, or solvency issues.

Why General Contractors Choose SDI?

General contractors opt for SDI over traditional subcontractor bonds for several reasons:

  • Faster Claims Resolution: SDI allows the general contractor to manage default issues directly, ensuring quicker project completion. In contrast, traditional bonds involve a longer claims process controlled by the surety company.
  • Control Over Defaults: In the event of a subcontractor default, the general contractor takes control, avoiding delays associated with surety rebidding or fund penalties.
  • Cost-Effective Coverage: SDI covers more subcontractors for less cost compared to bonding, and offers long-term warranties (5-10 years).
  • Assignment of Benefits: Some SDI policies allow for benefit assignment if the general contractor defaults.

SDI vs. Surety Bonds in the eyes of a General Contractor

While SDI offers a streamlined solution, it differs from traditional surety bonds:

  • Two-Party vs. Three-Party Agreement: SDI is an agreement between the contractor and insurer, while surety bonds involve three parties (obligee, principal, and surety).
  • Claims Process: With SDI, general contractors resolve issues; with surety bonds, the surety takes over and controls the process.
  • Cost Determination: SDI premiums are based on pooled risk, while surety bonds consider project size and potential loss.
  • Coverage Specificity: Surety bonds are project-specific; SDI is term-based, covering multiple projects.


Is SDI Right for Your Construction Business?

Subcontractor Default Insurance provides a proactive way for general contractors to manage subcontractor performance and avoid costly delays. Our team can help you determine if SDI is the right solution for your projects, offering guidance through every step of the process.


The most common companies that provide Subcontractor Default Insurance (SDI) are typically large insurance companies that specialize in construction-related risk management. Some of the most well-known providers include:

  1. Zurich North America
    Zurich is one of the leading providers of SDI, offering coverage tailored for large contractors and construction managers. They have extensive experience in the construction industry and offer risk management services alongside insurance.
  2. AXA XL
    AXA XL is a major player in the construction insurance sector and offers SDI coverage as part of their overall portfolio. They focus on providing contractors with solutions to manage subcontractor risk.
  3. Liberty Mutual Insurance
    Liberty Mutual provides SDI solutions as part of their broader construction insurance offerings. They work with contractors to manage risks associated with subcontractor performance and default.
  4. Arch Insurance
    Arch is another prominent SDI provider, focusing on large construction firms that want alternatives to traditional subcontractor bonding.
  5. Travelers Insurance
    Travelers offers SDI policies and emphasizes loss control services alongside insurance coverage, helping contractors prevent defaults and manage risks.
  6. The Hartford
    The Hartford provides SDI coverage, particularly aimed at larger construction projects, and supports risk management initiatives to mitigate subcontractor default risk.

These companies offer SDI as part of a larger suite of construction-related insurance products, making them go-to providers for general contractors seeking alternatives to surety bonds.

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