Subcontractor Default Insurance (SDI)

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.