Subcontractor Default Insurance (SDI)
Also known as: SDI, Subguard, Contractor Default Insurance, Default Insurance
Subcontractor Default Insurance (SDI) is a first-party insurance policy that a general contractor buys to protect itself against the financial consequences of a subcontractor failing to perform its contractual obligations — going bankrupt, abandoning the job, or delivering defective work. Unlike a bond, SDI is a two-party contract between the insurer and the general contractor: the GC selects the subs it enrolls, controls the claim, and funds completion directly, then recovers costs above its retention from the insurer. It is frequently sold under the trade name "Subguard" and is designed to substitute for requiring each subcontractor to furnish a performance bond.
SDI matters because it hands control to the general contractor. With a traditional surety bond, the surety investigates and decides how to remedy a default, which can be slow; with SDI, the GC can step in immediately to keep the schedule moving and seek reimbursement afterward. In exchange, the GC pays the premium (subs do not), absorbs a substantial self-insured retention and co-payment on each loss, and must run rigorous subcontractor prequalification because it is now underwriting its own trade partners. That trade-off makes SDI best suited to large GCs with high subcontracted volume and strong balance sheets.
A key nuance for a smaller subcontractor: on an SDI job you typically are not asked to post a payment bond or performance bond, which can lower your bid — but you are subjected to a demanding prequalification review of financials, references, and capacity. SDI also does not protect the project owner directly the way a bond protects an obligee, so owners sometimes still require bonds on public work. On big projects, SDI is often coordinated with a wrap-up (OCIP/CCIP). Understand which risk-transfer tool the contract actually uses, because it determines your bonding costs, your paperwork, and who gets paid if a default occurs.
Real-world scenario
Cornerstone Construction Group, a general contractor self-performing a $60,000,000 mixed-use project, buys a Subcontractor Default Insurance (SDI) program instead of bonding every trade individually. The policy carries a $50,000,000 aggregate limit, a $30,000,000 per-loss limit, a $500,000 deductible per default, and a 20% co-payment on the next $1,000,000 of loss. Cornerstone pays an annual premium of $540,000, priced at roughly $0.30 per $100 of the $180,000,000 in enrolled subcontract value it prequalifies and runs through its own risk-management program each year.
Mid-project, a drywall and framing subcontractor holding a $4,200,000 subcontract walks off the job insolvent. Cornerstone must re-procure and finish the scope. It incurs $1,450,000 to bring in a replacement sub at higher rates, $85,000 in legal and consultant fees, $150,000 in re-bid and re-procurement costs, $75,000 in extended general conditions, and $120,000 in exposure to owner liquidated damages — a total default loss of $1,880,000. Unlike a performance bond or payment bond, where the surety investigates and controls the completion, SDI is a first-party policy that lets Cornerstone manage the takeover directly.
After applying the $500,000 deductible and the $200,000 co-payment share, the SDI carrier reimburses Cornerstone $1,180,000. The insurer then pursues the defaulted sub's remaining assets and personal guarantees through subrogation, recovering an additional $310,000 that partially offsets the insured loss. Because the program is portfolio-based, that single claim leaves $48,120,000 of aggregate limit intact for the rest of the policy year.
How it affects your premium
SDI pricing is driven less by a single project and more by the contractor's whole book of subcontracted work and the maturity of its prequalification program. Underwriters weigh:
- Enrolled subcontract volume — premium is typically a rate per $100 of enrolled value, so a larger annual book of trade work means a larger base premium even at the same rate.
- Deductible and co-payment structure — a higher first-dollar retention (functionally a large self-insured retention) lowers premium but shifts more of each default onto the contractor's balance sheet.
- Prequalification rigor — documented financial vetting, single-sub limits, and bonding-capacity checks reduce expected default frequency and earn credits.
- Trade and project risk mix — mega-projects, single large subs concentrated in one scope, and volatile trades (steel, mechanical, curtainwall) raise the rate versus a diversified book of smaller subs.
- Loss history and default track record — prior takeovers, insolvencies, and the contractor's completion experience directly move the rate.
- Per-loss and aggregate limits selected — higher limits to cover the largest single subcontract and the full portfolio increase premium.
- Contractor financial strength — working capital, backlog quality, and surety relationships signal ability to absorb retentions and manage a takeover.
Common misconceptions
Myth: SDI is just a bulk substitute for subcontractor bonds, so my subs are protected the same way.
Reality: SDI protects the general contractor, not the project owner or lower-tier suppliers — it has no separate labor-and-materials payment guarantee. A surety bond is a three-party instrument that also backstops payment to subs and suppliers, which SDI does not replicate.
Myth: If a subcontractor defaults, the SDI carrier steps in and completes the work like a surety would.
Reality: SDI is first-party insurance that reimburses the GC's own costs to complete — the contractor controls the takeover and re-procurement, unlike the surety-driven process under contract surety. The insurer pays covered loss after the deductible and co-payment rather than performing the work itself.
Myth: There is no deductible or contractor cost-share on an SDI claim.
Reality: Nearly every SDI program carries a substantial per-loss deductible plus a co-payment band, so the contractor absorbs meaningful first-dollar and shared loss on each default before reimbursement begins.
Frequently asked questions
How is SDI different from requiring subcontractor bonds?
Does SDI cover subcontractor payment defaults to suppliers and lower tiers?
Can SDI be used alongside a wrap-up insurance program?
Who is eligible to buy SDI?
How does the limit structure work across multiple projects?
Sources cited
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