There’s good news to share for those in the commercial construction trade: The year ahead is likely to usher in a new era in Subcontractor Default Insurance, or SDI.
For years, Zurich Insurance Ltd. had been the only insurer that offered SDI, in a line that it called Subguard. That slowly changed, however, as other insurance companies grew more comfortable with the idea of offering policies that cover defaults.
There are now a half-dozen carriers doing so, and more are expected to jump aboard.
Beyond Zurich, the bigger players that most recently entered the business include Berkshire Hathaway, Arch, Axa XL, Cove Programs Insurance Services and Hudson Insurance Group.
As in most things related to insurance, sifting through the carriers’ offerings, including understanding what’s covered and what’s excluded in subcontractor default insurance policies, can be tricky work.
Simply put, SDI reimburses the contractor for costs related to a default by either its subcontractor or supplier.
Typically, SDI claims stem from labor, work delay and quality issues, not financial-related defaults. That’s not surprising, given the labor shortage that has afflicted the construction business over the past few years.
SDI isn’t for everyone, and generally it’s a better fit for larger contractors with jobs that extend into multiple years.
Unlike a bond, SDI is not a guarantee of performance or payment. While a bond represents an agreement between the general contractor, subcontractor and surety, SDI is strictly a two-party agreement between the contractor and insurer.
In practical terms, that means the SDI insurer cannot deny coverage for a default by a subcontractor covered by the policy. GCs like it because it gives them greater control over the claims process. But an SDI policy comes with greater responsibility. Contractors, not the SDI insurer, have the burden of pre-qualifying subcontractors.
GCs also can save money with an SDI policy, although the deductibles with these policies can easily amount to tens of thousands of dollars; performance bonds, on the other hand, have no deductible.
An SDI policy also typically covers only a fraction of the value of all subcontracts, while bonds are issued in the same value as the subcontracts.
We’ve said this before, but it bears repeating: We don’t think the subcontractor default insurance market will ever replace traditional payment and performance bonds as a go-to option for most projects, but SDI is a good alternative to consider for large-scale construction projects.
And the fact that SDI coverage is about to become more broadly available is, without a doubt, welcome news.
Tom Patton is a Surety Advisor with CCIG. He also is on the board of directors of the Rocky Mountain Surety Association. Reach him at TomP@thinkccig.com or 720-330-7922.
CCIG is a Denver-area insurance and surety brokerage with the full-service capabilities of a national brokerage.