Skillings Shaw Surety Bonding

Subcontractor Default Insurance (SDI)

Subcontractor Default Insurance is commonly referred to as SubGuard, the policy developed and marketed by Zurich Surety in 1996 as an alternative to subcontractor Performance & Payment bonds. Arch Surety and a few other surety companies have recently begun offering similar products.

So what is the difference between SDI and sub bonds?

A surety bond is a three party agreement where the surety guarantees the performance and/or payment of subs by the contractor to the owner . Subcontractor surety bonds have a long history in the U.S. and are a good risk transfer mechanism for contractors.  SDI is an insurance policy. Unlike surety bonds, SDI is not first dollar coverage and claims are subject to high deductibles and co- pays, similar to how some health insurance plans operate.  Because of the high deductibles, GC’s are required to establish escrow accounts for claims that fall below the deductible or within the copay. Additionally, the GC, not the surety, is responsible for prequalifying the sub, and the GC assumes greater responsibility in managing claims against subcontractors.

Interestingly, SDI does not offer payment protection for suppliers and 2nd tier subs, like a sub-contractor payment bond would. If a sub went bankrupt leaving unpaid lumber bills, for example, their surety payment bond would cover those costs, leaving the GC and supplier whole.

Did you know that SDI requires the same kind of underwriting process as a surety bond? SDI underwriting generates a score which the carriers use to develop programs. Depending on where the score falls in their systems, programs can be broad or restrictive. Program sizes and capacity can be limited across the SDI industry because of the need for substantial reinsurance support, and GC’s who purchase this insurance are required to maintain close and accurate records subject to the audit of SDI underwriters. Premiums are adjusted up or down after a project is completed based on the final contract price, not unlike bond premiums which are also adjusted for the same reason.

Typically, only large GC’s will consider purchasing SDI as an alternative to bonding subs. Many GC’s need to develop their own prequal techniques to determine if a sub qualifies for SubGuard, where the surety company performs a prequal process based on years of experience.

Whether it’s a question about a surety bond or a related issue, give Bob Shaw, Heidi Rodzen, or Melanie Bonnevie a call at (207)753-7300 We’re here.

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