While general contractors are planning for successful completion of their projects, they unfortunately must also account for risks associated with subcontractor defaults. General contractors have to understand their options for minimizing losses arising from subcontractor defaults and must take proper steps to protect their interests and ensure project completion. General contractors primarily minimize loss through contracts, bonding, and insurance. While there are many ways to manage and protect against the risk of loss from subcontractors, Subcontractor Default Insurance (“SDI”) is one product that can help.

A. Subcontractor Bonds
At the outset, it is important to note that SDI is not a bond. A subcontractor performance bond is a surety bond required by general contractors for subcontractors to guarantee their performance on a project. It is a three-party relationship between the principal, the surety, and the obligee. The principal (the subcontractor) purchases a bond for a project. The surety provides the bond and assures that the principal will perform. The obligee (the general contractor) is the party protected by the bond. If the subcontractor/principal defaults, the surety will generally step in and complete the work that the subcontractor failed to perform. Unlike insurance, a bond requires a subcontractor that obtains a bond to execute an indemnity agreement with the surety guaranteeing that any losses or expenses incurred by the surety will be reimbursed by the subcontractor.