Comparing Subcontractor Bonds to Subcontractor Default Insurance

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