What is Subcontractor Default Insurance?
Subcontractor Default Insurance (SDI) protects general contractors from financial loss when a subcontractor fails to fulfill their contractual obligations. That failure on the subcontractor’s part can include inability to staff the project, delivering defective work, cash flow problems, bankruptcy, and more. For general contractors grossing near or more than $100 million in revenue, subcontractor default insurance also presents a path to improve prequalification monitoring and subcontractor risk mitigation. Even smaller contractors below that income threshold can gain important knowledge of subcontractor default mitigation through the underwriting process.
What are the benefits of having subcontractor default insurance?
- Protection from Financial Loss
The primary advantage of SDI is that it protects general contractors from financial loss when a subcontractor defaults on a project. Even if a subcontractor requires supplementation or replacement across several projects, the costs and risk of loss are mitigated. - Streamlined Claims Process
With SDI, the claims process is usually streamlined, which means that general contractors can receive compensation quickly and efficiently. - Control Over Projects
In addition to the screening process that is part of an SDI program to ensure hiring of qualified subcontractors, an SDI policy allows contractors to decide when a subcontractor is at fault and exercise their own judgment on how to remedy a default. - Better Project Management
With SDI, general contractors can focus on managing the project and meeting deadlines rather than worrying about the financial implications of a subcontractor default.
What are some of the drawbacks of an SDI policy?
- Cost
One of the main challenges of SDI is the cost. Premiums for SDI can be high, which can impact a contractor’s bottom line and profitability. - Limited Coverage
SDI policies can have limitations and exclusions, which means that contractors may not be covered for all types of subcontractor defaults. - Complexity
SDI policies can be complex and difficult to understand, potentially making it challenging for contractors to determine what is covered and what is not. - Potential for Disputes
In some cases, there may be disputes between the general contractor and the SDI provider regarding the validity of a claim. This can lead to delays in compensation or even litigation.
Subcontractor default insurance can be a valuable tool for general contractors, and it is important to carefully consider if it’s the right solution for your construction firm. Contractors should weigh the cost of premiums against the potential benefits of SDI and carefully review the policy to ensure that it provides the coverage they need.
