Subcontractor default insurance (SDI) is a specialized policy that protects you — the hiring contractor — when a subcontractor fails to perform their contractual obligations. Unlike a surety bond, which is purchased by the sub, SDI is purchased by you and covers the additional costs you incur when a sub defaults: the cost to hire a replacement, schedule delays, re-work expenses, and associated damages. While SDI has traditionally been used by large general contractors, it is increasingly relevant for mid-size roofing contractors who rely heavily on subcontracted labor.
What SDI Covers
SDI responds when a subcontractor defaults on their contract — meaning they fail to complete the work, abandon the project, perform defective work that requires correction, or become financially insolvent mid-project. The policy covers:
Completion costs. The difference between what you would have paid the defaulting sub and what it costs to hire a replacement to finish the work. If your sub was contracted at $180,000 for a TPO installation and they default after completing 40%, and the replacement sub charges $140,000 to finish the remaining 60% (versus the $108,000 remaining on the original contract), SDI covers the $32,000 overage.
Re-work and correction costs. If the defaulting sub's completed work is defective and must be torn out and redone, SDI covers the cost of correction. This is particularly relevant for roofing, where a defective membrane installation may not be apparent until it leaks — and the tear-out and replacement cost can exceed the original contract value.
Delay damages. If the sub's default causes project delays that trigger liquidated damages or extended general conditions costs, SDI can cover those costs up to the policy's sublimit for delay.
Legal and administrative costs. The costs of terminating the sub's contract, re-bidding the work, and managing the transition to a replacement sub.
SDI vs. Subcontractor Surety Bonds
The traditional approach to subcontractor performance risk is requiring each sub to provide a performance bond. Performance bonds work, but they have limitations that SDI addresses:
Speed. When a bonded sub defaults, you must file a claim with the surety, which investigates the default, evaluates completion options, and decides how to respond. This process can take weeks or months. SDI claims are handled directly through your insurance carrier, typically with faster resolution because you control the process.
Sub willingness. Many smaller roofing subcontractors cannot obtain surety bonds, or the bond cost makes their bid uncompetitive. SDI does not require the sub to do anything — you purchase the policy and manage the risk yourself.
Relationship preservation. Bond claims create adversarial relationships. The surety may dispute the default, challenge completion costs, or delay payment. SDI claims are between you and your carrier, keeping the dispute out of the sub relationship (or what remains of it).
Who Should Consider SDI
SDI makes the most sense for roofing contractors who meet several criteria. First, you use subcontractors for a significant portion of your work — if subs represent less than 20% of your project costs, the premium may not be justified. Second, you take on projects where sub default would create serious financial exposure — large commercial reroofs, multi-building projects, or projects with tight deadlines and liquidated damages clauses. Third, your subcontractors are small firms that may not qualify for surety bonds or whose bonding capacity is limited.
Residential roofing contractors who use sub crews for tear-off, debris hauling, or gutter installation may find that the exposure does not justify SDI's cost, since replacement crews are generally available quickly and the contract values are lower. Commercial roofing contractors managing $500,000-plus projects with specialized sub work — metal panel installation, spray foam application, or green roof systems — have a stronger case for SDI.
Cost and Structure
SDI premiums are typically calculated as a percentage of your total subcontracted costs, ranging from 0.5% to 2.0% depending on the types of subs you use, your prequalification process, and your claims history. A roofing contractor subcontracting $2,000,000 in work annually might pay $10,000 to $40,000 for SDI. Deductibles range from $50,000 to $250,000, and policies typically require you to implement a subcontractor prequalification program — evaluating financial stability, insurance compliance, safety records, and references before engaging each sub.
Major carriers offering SDI include Zurich, Liberty Mutual, and Travelers. The coverage is typically written on a manuscript basis (custom policy form), so terms vary significantly between carriers. Work with a broker experienced in construction SDI to compare forms and negotiate terms that align with your subcontracting model.