Subcontractor default insurance (SDI)
SDI remains a preferred risk-transfer solution for managing subcontractor failure, particularly on complex, schedule-dependent projects. Demand continued to rise throughout 2025 despite several exposures, including cost inflation, schedule pressures, and labor constraints. This has reinforced SDI’s effectiveness as an alternative to surety bonds or self-insurance for general contractors.
Infrastructure growth and data center development have had a profound impact on the market. The carrier panel has remained stable, including Arch, AXA XL (Indian Harbor), Berkshire Hathaway Specialty Insurance, Hudson, Liberty Mutual, Optio (formerly Cove), and Vantage. While competition persists, underwriting standards have become more stringent through strategic capacity allocation and increased scrutiny of project types, geography, and sponsor strength. Enhanced due diligence at the subcontractor and project levels has become a more common practice.
Default notices in 2025 remained elevated compared with pre-2022 levels, primarily driven by root causes of subcontractor financial strains, including depleted margins and poor cash flow. Rising interest rates, material costs, and labor shortages continue to compound these risks. Importantly, a subcontractor’s history has little bearing on its ability to perform or avoid default; even companies that have operated for years could be at risk.
Looking ahead, default concerns will center on infrastructure projects, such as data centers, semiconductors, and clean rooms. Carriers have an interpretation of how exposures trend as subcontract values increase, which favors the idea that a “multiplier” for the cost to cure/finish a defaulted subcontract reduces as subcontract values increase in size to over $10 million. Although the industry average to cure a subcontractor default is 1.5 to three times the remaining subcontract balance, claims with subcontracts greater than $30 million have been filed more frequently in recent years than in the previous decade, surpassing policy limits.
Common elements in large defaults include:
The discovery of defects late in projects, with extensive rework.
A lack of lump-sum agreements for rework (time and materials agreements prevalent in large claims).
Supply chain disruptions and labor competition.
High-risk geographies include the state of Washington and elsewhere in the Pacific Northwest; Austin, Texas; Florida; and New York. Critical scopes include electrical, mechanical, curtain wall, and heavy mechanical.
Reinsurance markets are increasingly focused on data center life cycles, with concerns about obsolescence within five years. There is also apprehension given political and regulatory uncertainty in the U.S., centered on potential civil disruptions or increased risk exposure for contractors operating in certain states.
KEY POLICY & OPERATIONAL THEMES FOR 2026
Right of recovery/subrogation: Carriers are actively pursuing recovery when subcontractor reimbursements fall short; language and obligations vary.
Notice provisions: Strict timelines (often under New York state law) require immediate reporting of default indicators.
Indirect cost treatment: Disputes over credibility and attribution are occurring frequently.
Policy nuances: Default triggers, limit multipliers, coordination with other insurance, and cooperative subrogation provisions differ by carrier.
In 2026, underwriting discipline will remain a priority, supported by targeted risk appetites across segments, trades, geographies, and delivery methods. Technology adoption will enhance subcontractor risk selection and monitoring. To mitigate risk, general contractors should:
+ Complete annual review of program and policy parameters.
+ Update subcontract templates for clarity on default, supplementation, and termination.
+ Engage early with brokers and carriers.
+ Improve subcontractor qualification and performance monitoring.
+ Implement an SDI default playbook.
+ Train teams on policy differentiators and claim documentation.
+ Preapprove consultants and counsel for rapid engagement.
+ Conduct default scenario planning exercises.
+ Create a unified, well-documented system to streamline cost attribution practices.
Despite uncontrollable factors such as supply chain and labor availability, proactive planning and robust policy design remain critical to mitigating catastrophic losses in or alongside evolving infrastructure sectors
