When a subcontractor walks off a job or fails to deliver, the financial fallout lands on the general contractor. Understanding how SDI works and when to use it can be the difference between a manageable setback and a project-derailing crisis.

What Is SDI Subcontractor Default Insurance?

You might see SDI mentioned in a contract and wonder what it means. Subcontractor Default Insurance (SDI) is a coverage that protects a general contractor if a subcontractor is unable to complete their work or meet their contract obligations.

SDI doesn’t rely on bonds. The contractor carries an insurance policy covering direct costs, such as replacing the subcontractor or correcting unfinished work, and indirect costs, such as managing delays tied to the default. 

You’ll most often see SDI used by large contractors managing $100 million or more in subcontracted work each year. At such a scale, even one subcontractor default can disrupt schedules and budgets across multiple projects.

Are subcontractors required to have insurance? In most cases, yes — general contractors typically require subcontractors to carry their own coverage as a condition of the contract. But even when those requirements are in place, a subcontractor can still default by failing to perform, not just failing to insure. That's exactly the gap SDI is designed to fill.

So, on complex projects with dozens of subcontractors, things don’t always go as planned. SDI provides the contractor with financial protection to replace a trade partner or complete the work without putting the entire project at risk.

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Is Subcontractor Default Insurance the Same as a Bond?

Many construction projects mention SDI (subcontractor default insurance) alongside performance bonds, which raises construction questions like: are they the same? Both SDI and performance bonds protect projects from subcontractor default. The difference lies in who manages the risk and how quickly the response happens.

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Who Pays for Subcontractor Default Insurance?

The general contractor or construction manager usually purchases the policy and pays for the SDI. The cost appears as an insurance premium tied to the total value of subcontracted work. 

For many SDI programs, the premium typically ranges from 0.4% to 0.85% of the total subcontract value. On larger projects with many trades involved, contractors often see potential cost savings by not requiring each subcontractor to provide their own surety bonds.

Instead of each trade partner bringing their own bond, the contractor maintains a single policy for the entire project.

Most SDI policies include a deductible, so the contractor covers part of the cost if a subcontractor defaults before insurance applies.

Because they carry some of the risk, contractors tend to be careful about who they bring onto the job.

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When Do General Contractors Use SDI Instead of Requiring Bonds?

Contractors often consider SDI when they’re managing multiple prequalified subcontractors across several projects simultaneously. On large commercial builds, waiting for a surety investigation after a default can slow decisions.

With SDI, the contractor can decide how to proceed, whether that means bringing in another electrical crew or finishing a portion of the work with an existing trade partner. The policy covers the financial risk while ensuring proactive risk management.

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What Type of Insurance Should a Subcontractor Have?

Even on projects with an SDI program, subcontractors still carry their own core insurance coverage. This includes general liability, workers’ compensation, commercial auto liability, and sometimes umbrella coverage.

SDI doesn’t replace these policies because it protects the general contractor in the event of a subcontractor's default. On the other hand, subcontractor’s insurance covers day-to-day job-site risks, such as property damage, injuries, or vehicle incidents.

During the prequalification process, subcontractors provide insurance certificates, financial information, and project experience, so contractors can feel confident about the teams joining the project.

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What Gets Covered Under an SDI Policy?

If a subcontractor can’t finish the job, the contractor still has to figure out how to keep the project moving. An SDI policy covers the cost of stepping in and resolving the issue. They might bring in another crew to finish any unfinished framing, correct defective electrical work, or cover additional expenses such as extended site supervision or schedule acceleration.

Most SDI policies last about 2 years. If a covered loss occurs during that time, the insurer reimburses the contractor for eligible costs related to completing the subcontractor’s work.

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How Does This Impact Your Compliance Tracking?

When SDI is part of a project, compliance tracking takes a slightly different path. Teams still confirm the general contractor has active SDI coverage, but they also need to understand which subcontractors are working under that program.

However, the everyday insurance requirements don’t disappear. Subcontractors still carry general liability, workers’ compensation, commercial auto, and umbrella coverage. For example, if a delivery truck damages property or a worker is injured on site, those policies respond. SDI comes into play only if a subcontractor cannot complete their scope of work.

illumend, powered by myCOI, empowers compliance teams to keep these layers visible. Instead of chasing paperwork across projects, teams can see compliance requirements clearly in one place.

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Can illumend Help Track SDI Coverage?

Yes. illumend empowers construction managers and compliance teams to keep different insurance structures organized across projects.

For example, one project might rely on traditional bonding, while another operates under an SDI program. The platform helps teams quickly see what documentation supports it. As an insurance compliance platform, illumend keeps coverage details, certificates, and compliance requirements organized in one place.

With real-time visibility and guidance from Lumie™, teams can spot missing documents or coverage gaps early. This gives them time to resolve issues before an audit happens or before the problem begins to affect the project.