Understanding Subcontractor Default Insurance

Understanding Subcontractor Default Insurance

Subcontractor Default Insurance (SDI) provides insurance for general contractors against a default from a subcontractor. It is a risk mitigation tool for General Contractors (GC). The coverage is an alternative to a surety bond and is purchased from an insurance carrier in order to protect the general contractor from the subcontractors they hire. There are two types of default:

  • Default of performance – failure of the subcontractor/supplier to fulfill the terms of the of the covered subcontract or purchase order as determined by the insured or a legally binding authority.
  • Insolvency – bankruptcy, filing for chapter 11 or chapter 7, or a voluntary resolution for the liquidation of the subcontractor. 

SDI insures:

  • Cost of completing work
  • Cost of correcting defective / non-conforming work
  • Legal expenses
  • Costs incurred during any investigation, adjustment, litigation and dispute defense for the default.
  • Indirect costs such as liquidated damages, job acceleration, and extended overhead that result from a default. Indirect costs are subject to a sub-limit, which vary by program. 

SDI does NOT insure: 

  • Cost overruns/project delays if the subcontractor is not declared to be in default or has cured their default.
  • A loss that is the result of a fraudulent or dishonest act committed by the insured (GC)
  • Loss arising from previously defaulted subcontractors on a previous project.
  • Loss arising from a bonded subcontractor / supplier.

SDI Benefits:

Key advantages of this coverage include:

  • GC is not reliant on the subcontractor’s Surety to manage the default process, thus allowing the GC to keep the project on schedule.
  • SDI is not limited to the penal sum of the bond. 

SDI Challenges:

Like any coverage, insureds should be aware of any cons:

  • GC could face increased financial exposure if faced with multiple defaults.
  • Does not protect subcontractors if the GC becomes insolvent.

Construction projects are fraught risk you cannot control.  SDI can alleviate some of that stress. Have any questions? Contact TSIB today and speak with one of our knowledgeable Risk Advisors. 

TSIB’s Risk Consultants are currently servicing the following locations:
East Coast: New York City, NY; Bergen County, NJ; Fairfield County, CT; Philadelphia, PA
Texas: Austin, San Antonio, Houston, Dallas
California: Orange County, Los Angeles County, Riverside County, San Bernardino County, San Diego County

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