Subcontractor default insurance is a first-party insurance policy that reimburses a general contractor for the financial losses it incurs when one of its subcontractors fails to perform. The general contractor declares the default, hires a replacement, pays for completion out of pocket, and then submits a claim to the insurer for reimbursement. In exchange for carrying that work and that exposure directly, the contractor gets control over the recovery process and avoids waiting on a third party to decide what happens next.
How SDI Works in Practice
SDI, often referred to by Zurich’s brand name SubGuard, treats subcontractor failure the way other first-party policies treat property losses: the insured incurs the cost, documents it, and asks the carrier to pay. The general contractor is the policyholder and the only party with rights under the policy. When a subcontractor defaults, the contractor doesn’t hand the problem to anyone else. It mobilizes a replacement on its own schedule, manages the completion work, tracks every dollar spent, and then presents those costs to the insurer.
That structure appeals to large contractors because it keeps the job moving. There is no outside investigation standing between the default and the fix. The price of that control is cash flow: the contractor funds completion first and recovers later, after absorbing a deductible and a shared co-payment layer that can run well into seven figures before the insurer pays at 100 percent.
How SDI Compares to a Surety Bond
A performance bond and SDI solve the same problem from opposite directions. With a performance bond, the surety investigates the default, decides whether to arrange completion or pay, and controls the pace of the response. The general contractor files a claim and waits. With SDI, the general contractor runs the response and the insurer reimburses afterward.
The other difference matters to everyone below the general contractor. A surety payment bond gives subcontractors, sub-subcontractors, and material suppliers a direct claim against the bond if they aren’t paid. SDI offers no payment protection to anyone in the chain; it is strictly an agreement between the general contractor and the insurer.1NASBP. Subcontract Bonds and Subcontractor Default Insurance Comparison Some SDI policy forms don’t even require the general contractor to notify the subcontractor that a default has been declared before filing a claim.2American Bar Association. The Silent D in SDI – Subcontractors May Not Need to be Notified of Default for Prime Contractors to Receive Subcontractor Default Insurance Coverage
Who Can Actually Buy SDI
SDI is not a general-market product. Carriers typically look for annual subcontract volume in the range of $50 million to $100 million, and generally suggest that subcontracted values should exceed $75 million per year before SDI is cost-effective.3GRSM. Will Subcontractor Default Insurance Still Have Value in the Recovering Economy That effectively limits the product to large national and regional contractors.
Underwriters also look hard at how the contractor manages risk internally. Firms with strong prequalification procedures, financial vetting, and project oversight get better terms. Some insurers require specific mitigation measures, such as contingency reserves or subcontractor diversification plans, as a condition of coverage. A contractor that wants SDI purely as a backstop, without investing in prevention, will pay significantly more or be declined.
Zurich was for years the only carrier writing SDI through its SubGuard product. The market has since expanded to roughly half a dozen carriers, including Berkshire Hathaway, Arch, AXA XL, Cove Programs Insurance Services, and Hudson Insurance Group.4CCIG. Insurers Expanding into Subcontractor Default Insurance Market Zurich’s SubGuard remains the most established program.
What SDI Pays For
SDI generally covers both direct and indirect costs following a default. Direct costs include hiring a replacement subcontractor and correcting defective or nonconforming work left behind. Indirect costs can include liquidated damages assessed by the owner, acceleration of other subcontracts to recover schedule, and extended general conditions and overhead tied to delay.
The breadth of indirect coverage is one of SDI’s real advantages over bonding. A performance bond typically covers the cost to complete the defaulting scope up to the bond amount. SDI can reimburse the downstream ripple effects a single subcontractor’s failure causes across the rest of the project. Which indirect costs are actually covered varies by policy form and has to be negotiated during placement.
Common Exclusions
Every SDI policy excludes defaults that occurred before the policy’s effective date, so coverage cannot be bought to address an existing problem. Fraud and misrepresentation by the insured contractor are excluded, as are losses tied to the contractor providing professional services such as design work. Bodily injury sits under general liability, not SDI.
The fraud exclusion runs both ways. If a subcontractor’s default resulted from fraudulent conduct the general contractor knew about and failed to disclose during underwriting, the insurer can deny the claim. Prequalification records showing due diligence before each subcontractor was hired become important evidence if a claim is ever disputed.
What SDI Costs
Premiums
The general contractor pays the premium as the policyholder, calculated as a percentage of total annual subcontract volume. For a well-established contractor with roughly $200 million per year in subcontracted work, premiums typically run 0.85 to 1 percent of those costs.5IRMI. Bonding Tips and Tactics – Contractor Default Insurance Rates move with claims history, risk management quality, and the deductible and co-payment levels selected. Because SDI consolidates all subcontractor risk under a single policy instead of a bond for each subcontractor, the total program cost can be competitive with bonding at scale. Contractors commonly pass the premium through to owners as part of bid pricing.
Deductibles and Co-Payment Layers
SDI is not first-dollar coverage. The contractor absorbs a deductible on every default before the insurer pays anything. Deductibles are negotiable and have historically ranged from $350,000 to $2 million per loss. After the deductible, a co-payment layer applies in which the contractor continues to share costs with the insurer. That co-payment layer has historically ranged from $1 million to more than $5 million.6NASBP. Subcontractor Default Insurance – Its Use, Costs, Advantages, Disadvantages and Impact on Project Participants Only once both layers are exhausted does the insurer pay 100 percent, up to the policy limit.
This structure favors contractors who rarely have defaults and want catastrophic protection. A firm dealing with frequent low-dollar failures will burn through retention without ever reaching the coverage layer. The high retention also pushes contractors to prequalify aggressively, which is exactly the behavior insurers want to reinforce.
Policy Limits
SDI policies carry a per-occurrence limit (the maximum for a single default) and an annual aggregate limit (the maximum across all defaults in a policy year). Per-occurrence limits commonly reach $30 million to $50 million, and aggregate limits can run to $100 million to $150 million, depending on program size and negotiating position.6NASBP. Subcontractor Default Insurance – Its Use, Costs, Advantages, Disadvantages and Impact on Project Participants
When a Default Claim Is Triggered
A default claim arises when a subcontractor fails to meet its contractual obligations in a way that materially disrupts the project. Financial distress is the clearest trigger: insolvency, bankruptcy, or an inability to pay workers and suppliers stops the work and forces the general contractor to step in.
Persistent performance failures are another common trigger. A subcontractor that repeatedly delivers nonconforming work, misses milestones, or requires constant rework may be declared in default. SDI policies generally require the contractor to document the pattern of failures and show that the subcontractor was given an opportunity to cure. Skipping that paper trail is a reliable way to get a claim denied.
Regulatory problems can also constitute a default. If a subcontractor loses a required trade license, is shut down for serious safety violations, or faces government action that prevents it from continuing, the contractor can file. The key is showing that the regulatory issue directly prevented performance, not that it was a peripheral legal problem.
Filing a Claim
When a subcontractor defaults, the general contractor must notify the insurer in writing within the policy’s notice window. Under Zurich’s SubGuard form, that window is 180 days from the date the contractor sends written notice of default to the subcontractor.2American Bar Association. The Silent D in SDI – Subcontractors May Not Need to be Notified of Default for Prime Contractors to Receive Subcontractor Default Insurance Coverage Other forms set different deadlines. Missing the notice window can forfeit the claim entirely.
The submission requires substantial documentation: the original subcontract, evidence of the default, records of attempts to get the subcontractor to cure, and a detailed cost breakdown covering both direct completion costs and indirect losses such as delay and acceleration expenses. Insurers routinely ask for backup documentation and may require third-party assessments, such as engineering evaluations or independent schedule analyses, to verify scope and dollar value.
Because the contractor pays for completion and replacement out of pocket before seeking reimbursement, the financial documentation has to hold up to scrutiny. Sloppy record-keeping is where most SDI claims run into trouble. Contractors with established cost-tracking systems for default events recover faster and more fully than those reconstructing expenses after the fact.
The Public Project Boundary
SDI does not work on federal public construction. Federal law requires performance and payment bonds on any federal construction contract over $100,000, and insurance does not satisfy that requirement.7Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works The Federal Acquisition Regulation lists the acceptable alternatives for smaller contracts, including payment bonds, irrevocable letters of credit, escrow agreements, and certificates of deposit, and SDI is not among them.8Acquisition.GOV. Part 28 – Bonds and Insurance
Every state has its own version of the same rule, commonly called a “Little Miller Act,” requiring surety bonds on state-funded public construction. SDI cannot substitute for those bonds either. In practice, SDI is a private-sector tool. A contractor working across both markets will bond its public work and may use SDI to manage subcontractor risk on the private side.
Negotiating the Policy
SDI is regulated as commercial insurance, not under the surety statutes. State insurance departments oversee underwriting standards and claims handling, but because SDI policies are heavily negotiated between large contractors and specialized insurers, the policies don’t go through the standardized rate-filing and form-approval process more common insurance lines require.
That makes negotiating skill matter more than it does with off-the-shelf policies. The provisions worth closest attention are the definition of “default,” the list of covered indirect costs, the notice period for claims, the dispute resolution mechanism, and the co-payment percentages. A broker who specializes in construction insurance is close to essential, because the specific policy wording decides whether a future claim gets paid.