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Do you need subcontractor default insurance?

Every time a construction contractor bids on and begins a new project, subcontractors will usually need to be brought in in order to complete certain aspects of the work. Most contractors here in California and elsewhere work with certain subcontractors on a regular basis, so they are aware of their capabilities, work ethic and reliability. However, circumstances can change from project to project and it might be worthwhile to look into obtaining subcontractor default insurance.

This type of insurance is different than obtaining a subcontractor surety bond. With a surety bond, the bond company steps in if the subcontractor defaults and makes sure the project is completed. However, the contractor must wait for the bond company to conduct an investigation and make a determination whether the subcontractor breached its contract.

With default insurance, the contractor can file a claim when it is believed the subcontractor breached the parties’ agreement. The claim is paid and the contractor can continue with the project. However, unlike with a surety bond, the contractor now becomes responsible for making sure a new subcontractor is chosen and that the project is completed in accordance with the contract.

Other differences also exist between surety bonds and subcontractor default insurance. Thoroughly reviewing the two options by conducting a cost-benefit analysis could help identify which would work best under the circumstances. Not every California contractor uses either product, and that may be appropriate for smaller projects, but when working on a large development with a substantial amount of money at stake, it could be worth at least looking into as an added layer of protection.