Beacon News

Subcontractor Default Insurance (SDI) is an insurance product which can be very useful for construction companies seeking to reduce their risk related to subcontractors who might default on a project. SDI protects general contractors (GCs) with insurance coverage for direct and certain indirect costs in the case of a subcontractor default. Beacon provides a wide range of services to insurance companies to mitigate their risk both in underwriting an account or adjusting a claim related to Subcontractor Default Insurance.

SDI is much different than Subcontractor Surety Bonds. Among the key differences are:

• SDI is an insurance product (not a bond) which is based on a two-party agreement, between the general contractor and the insurance company. In contrast, Subcontractor Surety Bonds involve a three-party agreement (between the GC, the subcontractor, and the surety).
• In the case of a subcontractor default, with SDI the GC must manage the completion of the subcontractor’s work. In contrast, Sureties (or their agents) are directly involved with the completion process when a subcontractor is defaulted with a Subcontractor Performance Bond.
• With SDI, a GC may need to pay out money to complete a defaulted subcontractor's work and then submit documentation to recover their losses from the insurer. Beacon can assist in evaluating and adjusting these claims.
• General contractors assume other financial responsibilities with SDI, in terms of paying deductibles and co-payments on claims.
• An insurer must carefully review their potential risk when underwriting an SDI policy, such as doing the due diligence related to whether a subcontractor is prepared (financially, technically, and staffing-wise) to take on a project.

Beacon Consulting Group provides SDI-related consulting services for for both underwriting and claims. These services include:

• Evaluating projects and subcontractors prior to underwriting an account
• Evaluating direct and indirect costs related to a subcontractor's default and the terms of the policy
• Undertaking a cost-to-complete analysis related to the subcontractor's work
• Assisting insurers with the analysis and verification of SDI claims received (including detailed review of backup documentation related to the project and the subcontractor's role)
• Providing independent, third-party bid reviews, risk analysis, and review of subcontractor project plans (prior to an SDI policy being issued)