Are You a Candidate for Subcontractor Default Insurance?
Wondering if your company or project (yes, project-specific policies are available) is a good candidate for subcontractor default insurance (SDI)? If so, you can’t skip asking yourself the three following questions:
- Can we commit to enough volume? SDI policies are large deductible programs that require minimum annual commitments of $50 million in subcontractor cost enrollments for the financial metrics to work. Typically, programs run for an initial period of two to three years. For project-specific policies, $50 million is also the minimum starting point.
- Can the costs be absorbed by the project? These policies are paid for through project funds and general contractors must have the ability to get the owner to pay for this coverage. Depending on volume commitments the premium can be anywhere from .7% - 1.3% of sub costs. This becomes the biggest hurdle for most looking at this coverage
- Are we willing to do the prequalification work? SDI policies require that the GC perform the prequalification analysis and subcontractor enrollments. The general contractor must dedicate the time and energy around the administration of the SDI program, once the approval parameters are defined.
Should the answers to these basic questions lead to the next step, it’s time to get into the details. Next, there will be an underwriting process by the insurance carrier to make sure you’re a good fit. It’s also important to note that the market for this product is limited, with only four insurers offering this coverage.
A well-managed SDI program can be a positive risk-mitigation tool for general contractors that meet the criteria and commit to the process. Keep in mind that losses, especially early in the policy period can require the general contractor to come out of pocket, so proper qualification of subcontractors is critical. However, over time, a successful SDI program can become an independent profit center and pay healthy dividends to the general contractor.
Want to learn more? Contact Assurance and let’s kick it around.
- Part 1: Protecting Your Company from Subcontractor and Supplier Liabilities
- Part 2: Three Steps to Creating and Maintaining a Risk Transfer Program
- The 411 on Construction Defects
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