Subcontractor Default Insurance (SDI)
Subcontractor default insurance is a first-party policy that reimburses a general contractor or construction manager for the cost of completing the work when an enrolled subtrade defaults. Canadian contractors rely on specialized subtrades for most of the value of a project, so when one fails to perform, becomes insolvent, or otherwise defaults, the consequences are schedule disruption, added completion cost, and financial impact that flows through the entire job.
SDI is bought by the contractor, for the contractor. Unlike a surety bond, it creates no rights for the owner or for lower-tier trades. What it gives you is funding and control to fix the problem on your own terms.
What Is Subcontractor Default Insurance?
SDI is an insurance contract between the insured contractor and the insurer. It indemnifies the contractor for covered loss resulting from default by enrolled subcontractors and suppliers, subject to the policy’s definition of default, its notice requirements, and the contractor’s obligation to mitigate the loss. That makes it fundamentally different from a surety bond, which is a three-party guarantee written for someone else’s benefit.
Coverage varies by carrier and program design, but subcontractor default insurance commonly responds to:
- Completion and replacement costs to finish the defaulted scope (including the cost to replace the subcontractor and complete remaining work).
- Investigation, legal, and dispute costs associated with managing and resolving a covered default (within policy terms).
- Certain indirect costs that result from a covered default (may include acceleration, extended overhead, and in some cases liquidated damages), when included by the policy wording and subject to conditions and sublimits.
Important: SDI is not first-dollar coverage. Programs are structured with a self-insured retention or deductible, and usually a co-payment layer, so the contractor retains part of every loss.
The coverage is also sold under carrier brand names. SubGuard, a Zurich product, is used so widely that contractors often use the name generically for the entire class of coverage.
How Subcontractor Default Insurance Works
1. Enrolment
You decide which subcontractors and suppliers to enrol. Some programs enrol every subtrade; others enrol only those above a dollar threshold, or only those working on specific projects.
2. Prequalification
Under SDI the contractor, not a surety, carries out prequalification. Underwriters review the rigour of that process alongside your financial statements, work in progress and backlog before they offer terms.
3. Default and Notice
When an enrolled subtrade defaults, you declare the default and notify the insurer within the period the policy requires. Missing that deadline is one of the more common ways a valid claim runs into trouble.
4. Mitigation
You control the remedy. Supplement the trade, retender the scope, or complete it with your own forces. No third party has to consent before you act.
5. Proof of Loss
You document the costs and submit proof of loss. The insurer indemnifies you above your retention, less your share of any co-payment layer.
How a Loss Is Shared Between You and the Insurer
The figures below are illustrative only, since every program is negotiated, but they show the shape of a typical SDI recovery. Take a $2,000,000 default on a program carrying a $500,000 per-loss deductible and a 20% co-payment on the next $1,000,000. The contractor absorbs $700,000 — the full deductible plus $200,000 of the co-payment layer — and the insurer funds the remaining $1,300,000.
That retained figure is the point of the coverage. SDI is catastrophic protection with a working deductible, not a first-dollar guarantee, and it only makes financial sense if your balance sheet can absorb the retention on more than one loss in a policy year.
SDI vs. Surety Bonds: How They Compare
Both instruments manage the risk that someone fails to perform, but they are built differently and they protect different people. The distinction matters most when an owner is deciding what security to accept.
Swipe the table sideways to compare.
Subcontractor Default Insurance |
Surety Bond (CCDC 221 / CCDC 222) | |
|---|---|---|
Parties to the instrument
|
Two: the contractor and the insurer
|
Three: principal, obligee and surety
|
Who buys it
|
The general contractor or construction manager
|
The party being bonded, for the obligee
|
Who prequalifies the trade
|
The contractor
|
The surety
|
Who declares a default
|
The contractor
|
The obligee, under the bond terms
|
Who controls the remedy
|
The contractor
|
The surety
|
First-dollar coverage
|
No. Deductible, aggregate retention and co-payment apply
|
Yes, up to the penal sum of the bond
|
Payment protection for lower-tier trades and suppliers
|
None
|
Provided by a labour and material payment bond
|
If the prime contractor fails
|
No response
|
Performance bond responds to the obligee
|
Coverage scope
|
Only the subtrades enrolled in the program
|
The specific bonded contract
|
Best suited to
|
Large contractors with high subcontracted volume and formal prequalification
|
Any project where an owner or contractor requires performance or payment security
|
Does SDI Replace Surety Bonds?
Generally, no — and this is where Canadian practice matters.
The Surety Association of Canada has published a formal position on the question. Presenting SDI to an obligee as a substitute for contractor bonding is, in its words, misleading. SDI responds only to subcontractor default, so it does nothing if the prime contractor itself fails while the subtrades are performing. And because the contractor chooses which subtrades to enrol, an owner has no assurance that any particular trade is covered at all.
The payment side is the sharper issue. A labour and material payment bond is the only instrument that provides dedicated payment protection to subcontractors and suppliers. Without one, unpaid trades are left pursuing lien rights and a pro-rata share of holdback.
Statutory requirements point the same way. Under section 85.1 of Ontario’s Construction Act, public contracts of $500,000 or more require the contractor to furnish both a performance bond and a labour and materials payment bond, each for at least 50% of the contract price. An SDI policy does not satisfy that obligation. The standard Canadian forms — CCDC 220, 221 and 222 — remain the instruments owners ask for.
The practical answer is that subcontractor default insurance and surety bonds solve different problems. SDI is how a contractor finances its own subtrade risk. Bonds are how an owner, or a general contractor, secures performance and payment from the party it contracted with. Many Canadian contractors carry both, using SDI selectively on trades where bonding is difficult, slow, or unavailable.
SDI Program Features
Direct Default Coverage
Reimburses expenses directly related to the default, such as hiring new subcontractors to complete unfinished work or correcting defective workmanship.
Delay-Related Costs Coverage
Covers financial losses due to project delays caused by the subcontractor’s non-performance, including penalties or liquidated damages imposed by project owners.
Administrative and Legal Expenses Coverage
Pays for costs associated with managing and resolving the default, such as legal fees, mediation, or arbitration expenses.
Cost Escalation Coverage
Addresses increased expenses for completing work at higher rates due to a subcontractor’s failure, particularly in cases of market rate fluctuations.
Extended Project Overhead Coverage
Compensates contractors for prolonged general and administrative costs incurred during extended project timelines caused by the default.
Multi-Project Coverage
Extends coverage across multiple projects under a single policy, provided the subcontractors meet prequalification criteria.
Who Needs Subcontractor Default Insurance?
Risk Mitigation
Protects contractors from substantial financial losses caused by subcontractor defaults, including non-performance or insolvency.
Project Continuity
Ensures construction projects proceed without major disruptions or delays due to subcontractor failures.
Financial Protection
Covers costs that may not be recoverable through other means, such as surety bonds or warranties.
Control Over Resolution
Grants the contractor greater autonomy in managing the resolution process, allowing them to hire replacement subcontractors and avoid lengthy bond claim processes.
SDI is a large-contractor product, and carriers writing it in Canada set the bar high. AXA XL, which underwrites SDI here through its Canadian branch operations, publishes a target profile of general contractors and construction managers with USD 100 million or more in annual subcontract costs. A contractor is generally a candidate when:
- Subcontracted work makes up the majority of annual construction volume.
- Formal, documented subtrade prequalification is already in place.
- There is in-house capacity to manage a default — estimating, legal and project controls that can retender and complete a scope quickly.
- The balance sheet can absorb the retention on more than one loss in a year.
- Bonding every subtrade is impractical, slow, or restricts access to qualified trades.
If your firm does not meet that profile, subcontractor bonds backed by a surety’s own prequalification are usually the better route, and we can place those instead.
What Subcontractor Default Insurance Does Not Cover
The gaps are as important as the coverage, and they are where most disputes start.
- Your own insolvency. SDI protects you from your subtrades. It offers nothing to an owner if your firm fails.
- Subtrades you chose not to enrol. Coverage follows enrolment, not the subcontract.
- Payment protection for lower-tier trades and suppliers. That is the function of a labour and material payment bond.
- Design liability, unless the program is specifically endorsed for it. Design-build exposure normally belongs under contractors professional liability.
- Losses below your retention, plus your share of the co-payment layer.
- Ordinary construction defects unconnected to a declared default, which are a general liability or builders risk question.
What Does Subcontractor Default Insurance Cost?
SDI is rated on the value of the subcontracts enrolled in the program rather than charged as a flat premium. The rate you are offered turns on:
- The quality and documentation of your subtrade prequalification process.
- Your loss history with subcontractor defaults.
- The deductible, aggregate retention and co-payment share you accept — more retained risk means a lower rate.
- Trade mix and project type, since some scopes default far more often than others.
- Contract terms, including how much liquidated damages exposure you carry.
- Your financial strength, backlog and the depth of your project controls.
Because programs are individually negotiated and most published benchmarks come from the US market, the only reliable number is a quoted one. We can model an SDI program against the cost of bonding the same trades so the comparison runs on your figures rather than an industry average.
Benefits of SDI
Comprehensive Coverage
Addresses both direct and indirect costs, including legal fees, project delays, and corrective work.
Enhanced Prequalification Processes
Encourages contractors to adopt rigorous prequalification standards, reducing the likelihood of defaults.
Financial Stability
Safeguards profit margins and ensures project budgets remain intact, even in the face of subcontractor failures.
Frequently Asked Questions About Subcontractor Default Insurance
SDI is a two-party, first-party insurance policy: the insurer reimburses you, the contractor, for covered loss caused by an enrolled subtrade’s default. A surety bond is a three-party instrument involving the principal, the obligee and the surety, and it responds to the obligee under the bond’s terms. Under SDI you prequalify the trades and you control the remedy; under a bond the surety does both. SDI also does not provide the third-party payment protection an obligee receives under a labour and material payment bond.
Yes. SDI is written in Canada by specialty construction insurers and placed through licensed brokers. AXA XL underwrites it here through XL Specialty Insurance Company – Canadian Branch and AXA Insurance Company – Canadian Branch, and Zurich includes SubGuard in its Canadian contractor offering. The market is small and underwriting is selective, so terms are negotiated case by case rather than quoted from a rate sheet.
The general contractor or construction manager buys and owns the policy. In practice the cost is usually recovered through project overhead or general conditions, in much the same way bond premiums are recovered when subtrades are bonded instead.
No. Where an owner or a statute requires performance and payment security, SDI does not meet that requirement. Section 85.1 of Ontario’s Construction Act, for example, requires both a performance bond and a labour and materials payment bond on public contracts of $500,000 or more, each for at least 50% of the contract price. The Surety Association of Canada has taken the formal position that offering SDI to an obligee as a substitute for contractor bonding is misleading.
No, and this is the limitation most worth understanding. SDI creates no rights for lower-tier trades or suppliers. If payment fails they are left to lien rights and a share of holdback. Dedicated payment protection comes only from a labour and material payment bond.
Large. Carriers target contractors whose annual subcontracted volume runs into the hundreds of millions — AXA XL publishes a threshold of USD 100 million or more in annual subcontract costs — together with audited financial strength, documented prequalification, and the internal capability to complete a defaulted scope. Contractors below that profile are generally better served by bonding individual subtrades.
Always. SDI programs carry a per-loss deductible, an annual aggregate retention that caps your exposure across the policy year, and usually a co-payment layer in which you retain an agreed percentage of loss above the deductible. Accepting more retained risk reduces the rate.
Premium is rated against the value of the subcontracts enrolled in the program rather than charged as a flat amount. The rate reflects your prequalification discipline, subtrade default history, retention and co-payment structure, trade mix, contract terms, and financial strength.
Yes. Most programs are written on a rolling basis across your enrolled work rather than project by project, although project-specific enrolment is also available. Coverage follows the subcontracts you enrol, so consistent enrolment discipline is what keeps the protection intact.
Not by default. Design and professional liability exposure, including design-build and delegated design, normally sits under contractors professional liability rather than SDI. Some programs can be endorsed for limited design exposure arising from a covered default; confirm the wording before relying on it.
You do. The contractor declares the default, notifies the insurer within the period the policy specifies, mitigates the loss, and submits proof of loss with supporting documentation. Terminating the subcontract is not always required, but the policy’s definition of default and its notice deadlines govern — missing a notice period is one of the more common ways an otherwise valid SDI claim gets into trouble.
SubGuard is Zurich’s brand of SDI. It was the original product in the class and the name is often used generically, but other carriers write their own SDI forms with materially different wording on default definitions, indirect costs and co-payment. Compare the wordings, not the brand names.
Speak With a SDI Specialist
Subcontractor default insurance is one of the more complex placements in construction risk, and it is not the right answer for every contractor. Stanhope Simpson places both SDI and surety bonds, so the recommendation you get reflects your volume, your prequalification process, and your contracts.