Last edited 02 Jul 2019

Subcontractor default insurance (SDI)

In the United States, subcontractor default insurance (SDI), commonly known by its popular brand name Subguard, is a safeguarding tool for contractors to mitigate the risk of their subcontractors defaulting.

Rather than being a guarantee like a surety bond, it is an insurance product. A surety bond is an agreement between three parties – the contractor, subcontractor and surety. The performance of the subcontractor is guaranteed by the surety. By contrast, SDI is an agreement between the contractor and insurer.

Rather than providing a guarantee of performance or payment, the insurer commits to reimbursing the contractor for costs relating to default of a subcontractor or supplier. This is usually a high-deductible dollar amount, which means that the contractor must absorb some costs in rectifying the default, but the exact amount is negotiable.

The insurer can also replace the performance bonds of subcontractors by providing the contractor with additional cover against default losses. However, it does not act as a substitute for a payment bond, meaning that if the contractor defaults on payment to the subcontractor or becomes insolvent, the subcontractor is not covered by the policy.

SDI can be advantageous over a normal default process by avoiding litigation and delays that can impact on the project schedule.

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