What is subcontractor default insurance in construction?
Subcontractor default insurance (SDI) is an insurance policy bought by a general contractor or construction manager that reimburses the cost of a subcontractor's default, such as failing to finish its work or doing defective work, instead of requiring each sub to post a performance bond.
Subcontractor default insurance protects a general contractor against the cost of a sub that cannot finish. If a drywall sub goes out of business halfway through a job, the GC has to hire a replacement, often at a higher price, and absorb delays. With SDI, the GC can file a claim with its own insurer for those costs. The key difference from a bond is control: under SDI, the GC decides how to handle the default and then seeks reimbursement, instead of waiting for a surety to investigate and act.
SDI is usually bought by larger general contractors and construction managers that run enough subcontract volume to justify a program and have the staff to prequalify subs themselves. It is less common among small contractors.
How SDI works
- The GC enrolls subcontracts in the program, usually above a value the policy sets.
- The GC prequalifies each enrolled sub using financial statements, experience, backlog, and safety information. Insurers expect a documented prequalification process.
- A sub defaults. The GC declares the default under the subcontract terms.
- The GC fixes the problem by supplementing, replacing, or completing the sub's work.
- The GC submits a claim for covered costs, subject to the policy's deductible, co-payment, and limits.
Coverage terms, deductibles, co-pays, covered cost categories, and limits vary by insurer and policy. Read the policy form itself, not a summary, and work with a broker who handles construction programs.
SDI vs subcontractor performance bonds
| Topic | Subcontractor default insurance | Subcontractor performance bond |
|---|---|---|
| Who buys it | The GC, for its own protection | The sub, naming the GC as obligee |
| Who decides how to respond to a default | The GC | The surety, after investigation |
| Who qualifies the sub | The GC, under its own prequalification | The surety, through underwriting |
| Who pays first | The GC, up to its retained amount | The surety, then seeks repayment from the sub |
| Typical use | Large GCs and CMs enrolling many subs | Projects of any size where bonds are required |
A real-job example
Say a CM is running a hospital expansion with 30 enrolled subs. The mechanical sub, on a $4.2M subcontract, falls months behind and stops paying its suppliers. The CM issues a cure notice under the subcontract, then declares default. Rather than wait for a surety's investigation, the CM brings in a replacement mechanical contractor within two weeks and keeps the job moving. It then submits its excess completion costs, extra supervision, and documented delay costs as an SDI claim. What gets reimbursed depends on what the policy covers and the CM's retention. The deciding factor is speed, which is what CMs value most.
Common mistakes and disputes
- Thin prequalification files. If the GC cannot show it qualified the sub, the claim can be challenged.
- Not enrolling a sub. A subcontract left out of the program is not covered.
- Weak default paperwork. Notices and cure periods in the subcontract still have to be followed.
- Assuming owners accept SDI. Some owners and public agencies require bonds anyway. Check the prime contract.
- Treating SDI as a replacement for selection. The GC still pays its retention on every default.
Related terms
SDI relates to performance bonds, subcontractor prequalification, cure notice, termination for default, and surety. See how to prequalify subcontractors. Smart Business Automator stores sub prequalification documents and compliance records alongside each subcontract.
Frequently asked questions
Who buys subcontractor default insurance?
The general contractor or construction manager. It protects the GC, not the sub, and the GC carries the deductible and co-pay.
Does SDI replace performance bonds?
It can replace subcontractor performance bonds on private work where the owner allows it. It does not replace the GC's own bonds to the owner, and public owners often still require bonds.
Is SDI right for a small contractor?
Usually not. SDI programs fit contractors with large annual subcontract volume and a formal prequalification process. Smaller GCs typically rely on bonds for high-risk subs.
What does SDI cover?
Generally, the GC's costs to remedy a sub's default, such as completing or correcting the work. Exact covered costs, limits, and deductibles depend on the policy.
