Goldleaf Surety is often asked about the basic differences between subcontractor bonds and subcontractor default insurance (SDI). As part of a contractor’s risk management, it is important for your company to know and understand these basic differences. To that end, we want to share with you the table below from Leaderboard Magazine.
| Issue | Performance and Payment Bonds | Subcontractor Default Insurance |
| Pre-qualification Process | Conducted by the surety, a knowledgeable third party (extensive and ongoing) | Conducted usually by the general contractor, not a third party |
| Structure | Three-party agreement (general contractor, subcontractor, and surety) | Two-party agreement (general contractor and insurer) |
| Regulation | Sureties are admitted and regulated by state insurance departments, regularly filing rates and financial information | May be written on non-admitted or surplus lines basis, and therefore, no recovery under state guarantee fund |
| Risk | Complete risk transfer from general contractor to surety with first-dollar coverage | General contractor retains a portion of the risk through high deductibles and co-payments |
| Payment Protection for Subcontractors and suppliers |
100% payment bond, with first-dollar payment benefit for subcontractors and suppliers | No payment benefit for subcontractors and suppliers |
| Subcontractor Default Management | If subcontractor defaults, surety completes, arranges for, or pays for subcontract completion up to bond amount | General contractor must manage subcontractor default, including completion of subcontractor’s work |
| Payment of Losses | Surety pays losses after independent investigation | General contract must pay losses and then submit documentation to recover from the insurer |
| Legal Precedents | Extensive history of case law/legal precedents | Little or no case law/legal precedents |
| Confidentiality of Subcontractor Information | Subcontractor has confidential and on-going relationship with surety | Many subcontractors are uncomfortable providing sensitive financial data to the general contractor (who might be their competitor bidding on the next project) |
| Premium | Cost is calculated based on contract amount, depending on size and type of project | Cost is calculated on general contractor’s program costs and the deductibles and co-payments selected |
| Cancellation | The bonds cannot be cancelled | SDI can be cancelled by the insurer |
| Indemnity | Subcontractor is incented to perform by its indemnification obligation to the surety | SDI Provides no such incentive other than for the subcontractor not to be sued by the insurer |
| Limits | Combined performance and payment bonds are equal to 200% of the contract amount | Policy subject to aggregate limit and per loss limit; sub-limits also may apply, such as three or four times the subcontract value |
| Unseen Assistance | Sureties, with the expectation of no losses, provide assistance to bonded subcontractors through financing, engineering, and operations services | Insurers, with an expectation of losses, provide no assistance to subcontractors |
Source National Associate of Surety Bond Producers (NASBP), Surety Bond Quarterly, Spring 2016 (2017, Q3). “Sub Bonds vs SDI A Quick Reference Guide.” LeaderBoard Magazine
