Subcontractor Default Insurance (SDI) or Subguard is one of the essential tools that general contractors should have in the construction industry. This insurance aims to give protection to the contractors in case a subcontractor breaches the contract.Â
The growth of Subcontractor Default Insurance comes in tandem with more complex and competitive construction projects, so it is more crucial than ever for contractors to understand how SDI works. Otherwise, they risk losing their money investment as well as ruin their project deadlines.
What is Subcontractor Default Insurance?
It is a type of insurance that ensures coverage for general contractors in case a subcontractor does not adhere to a particular contract. Apparently, this default can involve, but is not limited to, the following:
“Failure to perform: The subcontractor fails to ensure the terms of the contract are met.
Insolvency– The subcontractor has gone bankrupt and is unable to honour his side of the contract.
Abandonment – For reasons unknown once the subcontractor has started the project he walks away.
SDI however is not unlike other traditional surety bonds. It focuses on securing the general contractors from incurring losses related to the failure of a subcontractor.
Therefore, this ultimately allows the contractor to have a better management of the contractor risk and rights to speed up the entire claims process of the project.
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Benefits of Subcontractor Default Insurance
There are several advantages of SDI for general contractors. These include;
Control over Risk Management: The contractor has the option of setting a benchmark for a default of a subcontractor instead of having to blindly follow the surety company’s set standards.
Insurance Coverage for Indirect Costs: SDI policies tend to allow not only for direct costs when in the process of completion but also other indirect costs such as liquidated damages, project delay, and extended overhead.
Broad Coverage: Spend time writing one contract and issue a single polices across numerous or multiple subcontractors on a project.
Flexibility: Choosing from varied policy structures including a policy which allows retrospective premium adjustments based on performance.
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How Subcontractor Default Insurance Works
By purchasing an SDI policy, general contractors are transferring the risk of defaulting on their subcontractors to an insurance company. Generally these steps occur:
Insurance Policy: Depending on the completion timelines, the contractor’s prequalification and management of subcontractors are all evaluated by the insurer to determine risk and costs.
Coverage Clause: Performance default, insolvency, and many other events will be covered in the scope of the policy.
Claims Process:Â If a subcontractor defaults, the contractor is able to file a claim with their insurance company and the firm will proceed to investigate whether the claim is valid and pay out the covered loss.
Coverage Details of Subcontractor Default Insurance Policies
Subguard insurance policies typically cover:
Direct Costs:
- Additional costs incurred in executing the same work for which the defaulted subrecontractor was first given the work.
- Expenses related to the rectification of the non compliant or defective work.
- Cost of engaging lawyers to handle disputes arising from the default.
Indirect Costs:
- Liquidated damages costs on projects that had delays due to the default.
- Cost incurred by accelerating the stage of the job finishing the job faster than it was planned.
- Other costs due to extended overheads such as indirect costs during the period when the project is put on hold.
Subguard Insurance Cost
The price of Subguard insurance is influenced by a number of factors which most of the time differ from state to state, country to country.
- The size and revenue of the contractor: This means that big contractors who have huge operations would have different pricing than small firms or rather contractors.
- The complexity of the project: projects with higher degree of complexity would have to pay higher premiums because the risk is larger.
- History of claims: Contractors who have a lot of claims in the past are believed to pay higher rates than those with no claims filed in the past.
Typical monthly premiums for Subguard insurance can range widely. For instance:
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| Provider | Monthly Cost | Annual Cost |
| NEXT | $1,300 | $15,600 |
| Liberty Mutual | $2,000 | $24,000 |
| Berkshire Hathaway | $3,000 | $36,000 |
| Zurich | $3,500 | $42,000 |
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Best Subcontractor Default Insurance Carriers
Always target construction-oriented insurance providers for SDI. The best include:
Liberty Mutual
They are well known for a heavy focus on construction projects and personal service. General contractors can turn out to be their ideal customer as they get specific policies that are constructed for them.
Pros:
- Quick Claims Settlement: Liberty Mutual helps to settle the claims of the contractors in a quick fashion enabling them to recuperate from losses in no time.
- The Insurance Construction Market: Their practical experience spans over a hundred years in the insurance business concerning the building industry.
- Custom Solutions: General contractors have specific roles to play in a project. They offer SDI construction insurance policies for them.
Cons:
- Service Rating Averages: Even though theirServices has a set reputation, there are some customers who claim that their experience with customer support is rather typical.
- Expensive Premiums: As some of its competitors, Liberty Mutual’ s premiums may be a bit higher.
Rating: 9/10
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Berkshire Hathaway
Along with SDI, they also provide a variety of insurance products. In these respects, they are well-known – flexibility of policy terms and solid financial strength.
Advantages:
- Variety of Options Available: Together with SDI, they offer a range of products, which are surety – and therefore more coverage options.
- Business with Honor and Integrity: The firm has a good reputation for decades within the insurance industry.
- Clear Claims Submission: Online or telefile claims that are simple for contractors while contacting.
Cons
- Â Expensive Premiums: It is common for them to charge more than other insurers propose for the SDI policies.
- Some Complaints: A number of users reported low ratings for customer service, in such aspects as claiming and answering questions.
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Rating: 8/10 .Â
NEXT Insurance
The NEXT Insurance is quite impressive because it has made a niche for itself in offering its services to small contractors. Offering subcontractor default insurance and other services of subcontracting seem easy with their site.
Pros:
- • Overall Best for Small Contractors: It should be noted that NEXT Insurance is ideal for small general contractors, as it is quick and easy to apply for them.
- Insurance Certificate is Provided Instantly: For contractors who require documentation fast, they assist by issuing certification online.
- Competitive Pricing: This is quite the statement, however they claim their premiums to be cheaper than many other traditional insurers.
Cons:
- Â Limited Coverage Options: As a new entrant, they are likely to have relatively poor coverage alternatives as compared to the bigger carriers.
- Customer Support Limitations: A number of users have had a difficult time during crucial periods, trying to contact customer support.
Rating: 9/10
Zurich
 Has been at the forefront of developing SDI products since the late 1990s. They have earned a compelling reputation as reliable providers of cover and also assist greatly throughout the prequalification of the subcontractor process.
Pros:
- Pioneering Experience: As one of the first SDI insurers in the US market, Zurich has accumulated a wealth of experience in this niche market.
- Â Entrustment Advocacy: They help out in the prequalification process of subcontractors that would be crucial for proper risk management.
- Â Business Accuracy: SDI also keeps enhancing their products as per what the market dictates and what contractors call for.
Cons:
- Â High Premiums: So far, this particular insurer offers quite expensive rates relative to the competition.
Rating: 8.5/10
