Subcontractor Default Insurance (SDI): The Alternative to Bonding That GCs Use on Big Projects
Subcontractor default insurance (SDI) — sometimes known by the Zurich brand name Subguard — is a type of insurance policy that a general contractor purchases to cover the financial impact of subcontractor defaults. When a sub fails to perform (abandons the work, goes out of business, can't meet schedule or quality), SDI pays the GC's cost to remedy the default, replacing what payment and performance bonds would otherwise cover.
SDI has become common on large private commercial projects — major developers often use it instead of requiring bonds from each subcontractor. It's less common on public work, where legal requirements (Miller Act for federal, little Miller Acts for states) mandate payment and performance bonds that SDI can't replace.
The core structural differences between SDI and traditional bonds:
SDI vs traditional bonds
- Who buys — Bonds are purchased by the sub at the GC's requirement. SDI is purchased by the GC directly as their own insurance policy.
- Who's protected — Bonds protect the GC (and owner) against sub defaults. SDI protects the GC against sub defaults — same protection, different mechanism.
- Claim process — Bond claims involve the surety, who investigates, may contest, and often takes months to resolve. SDI claims involve the GC's own insurer and resolve faster because the GC and insurer are on the same side from the start.
- Control — With bonds, the surety takes over defaulted work or pays the GC's cost to complete. With SDI, the GC directly manages replacement with SDI paying the cost; the GC keeps control of the project.
- Cost — Bonds cost the sub 1-3% of bonded value, typically passed through to the GC. SDI costs the GC around 0.5-1% of total covered subcontract volume, so can be cheaper overall on large programs.
- Underwriting — Bonds underwrite each sub individually; weaker subs pay more or can't get bonded. SDI underwrites the GC's entire sub program, so strong-GC programs get favorable rates even with some weaker subs.
A GC with an SDI policy enrolls covered subcontracts as they're executed. Not all subs are enrolled — SDI policies typically have coverage triggers based on subcontract value (e.g., subs above $500K, or above 0.5% of the GC's annual volume). Smaller subs are excluded and either bonded individually or uncovered.
When a covered sub defaults, the GC documents the default, completes or replaces the work, and files a claim against the SDI policy. The insurer covers the cost of completion, the cost of unpaid-to-lower-tiers that the GC steps in to pay, legal fees, and other direct costs of the default. The SDI policy has a per-claim deductible (often $250K-$1M depending on the policy) and an overall aggregate cap per policy year.
The speed and control advantage is real: the GC manages the replacement themselves, picks the replacement sub, and keeps the project moving. On a bonded default, the surety can take over, propose their own replacement, investigate the claim, and the project can stall for weeks during the process.
SDI policies have:
Typical SDI policy structure
- Per-claim deductible — $250K to $1M, sometimes higher for larger GCs
- Per-claim limit — often in the $25M to $50M range, sometimes up to $100M for megaprojects
- Aggregate limit per policy year — the total the insurer will pay across all claims in a policy year, typically 2-3× the per-claim limit
- Covered peril scope — defaults on covered subcontracts, including failure to pay lower tiers (which can trigger liens without the sub's actual inability to complete)
- Exclusions — pre-existing defaults (subs already known to be struggling at enrollment), war, nuclear events, and typical catastrophic exclusions
A single major sub default can exceed the per-claim deductible and trigger a significant SDI recovery. The GC's calculation is whether their expected annual claims volume times their program size justifies the policy premium. For large GCs running $500M+ in sub volume annually, SDI usually makes economic sense; for smaller GCs, traditional bonds per sub may be more efficient.
SDI isn't a universal substitute for bonds:
Situations where bonds remain the right mechanism
- Public work — federal projects require Miller Act bonds; state public work requires little Miller Act bonds; SDI can't legally substitute
- Owner-required bonds — many private owners still require performance and payment bonds, either as a blanket requirement or for specific subs; SDI doesn't satisfy those requirements
- Lender-required bonds — construction lenders sometimes require bonds to protect their collateral position; SDI may not satisfy the lender
- Lower-tier protections — SDI protects the GC; it doesn't provide the lower-tier payment protections that a payment bond gives to second-tier subs and suppliers directly
- Projects without a robust GC — SDI requires a well-managed GC with strong sub-management practices; smaller or less-capable GCs may not qualify for SDI pricing
The payment bond concern is meaningful. On a bonded project, a lower-tier sub or supplier who isn't paid can file a claim directly against the bond — a direct legal remedy independent of the first-tier sub's ability to pay. On an SDI project, that direct remedy doesn't exist; the lower-tier has to pursue the first-tier, who may be the one defaulting. Some SDI policies include provisions that backstop lower-tier claims, but the legal structure is different from a payment bond.
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SDI protects the GC. It doesn't give lower-tier subs and suppliers the direct legal remedy against a payment bond. On projects where lower-tier protection is legally important (public work) or contractually important (owner requirement), bonds remain necessary.
For subs, working on an SDI project means they don't have to provide a performance or payment bond. This saves them the bond premium and preserves their bonding capacity for other projects where bonds are required. Small specialty subs who can't easily get bonded at all benefit from the SDI model — they can participate in large projects without hitting a bonding wall.
The tradeoff: SDI projects typically include tighter GC sub-management practices. The GC has to qualify for SDI coverage, which means they prequalify subs more rigorously, monitor sub financial health during the project, and intervene earlier when subs show distress signals. Subs on SDI projects sometimes feel more closely watched than on bonded projects.
SDI insurers underwrite the GC's entire sub program. That underwriting scrutinizes the GC's prequalification process, sub-monitoring practices, and historical default experience. A GC with strong prequalification and low default history qualifies for favorable SDI rates; a GC with loose prequalification pays more or may not qualify at all.
This creates an incentive loop that tends to make SDI-using GCs more disciplined about sub management — the SDI policy's economics reward tight practices. For sophisticated GCs, SDI is less about the insurance per se and more about the operational discipline it enforces.
Many GCs use hybrid approaches — SDI for most subs, with bonds required on specific high-risk subs (very specialized trades, weak financial positions, unique project risks) or where the owner's contract requires bonds. A typical hybrid: SDI covers all subs above $100K; subs above $5M are also required to provide bonds as a second layer; public work portions require Miller Act bonds regardless.
The hybrid lets the GC leverage SDI's program-wide efficiency while still using bonds where specific situations warrant the additional protection.
SDI is the insurance-based alternative to traditional payment and performance bonds for private construction. It gives the GC speed, control, and program-wide cost efficiency. It saves subs the bond premium and preserves their bonding capacity. But it's GC protection, not lower-tier protection; it doesn't work on public projects; and it requires the GC to have strong sub-management practices. For large private-work GCs with disciplined operations, SDI is often the right choice; for smaller GCs or public work, bonds remain the right mechanism.
Written by
Marcus Reyes
Construction Industry Lead
Spent twelve years running AP at a $120M general contractor before joining Covinly. Lives in the world of AIA G702/G703, retainage schedules, and lien waiver deadlines. Writes about the construction-specific workflows that generic AP tools get wrong.
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