Subcontractor Default Insurance

Example

“The general contractor's subcontractor default insurance saved the project when the electrical subcontractor went bankrupt halfway through construction, covering the extra costs to hire a replacement.”

Memory Tip

Think 'SUB-marine going down' - when your subcontractor 'goes under' (fails), this insurance keeps your project afloat.

Why It Matters

This insurance protects general contractors from significant financial losses when subcontractors fail, which can otherwise threaten project completion and profitability. For construction companies, subcontractor failures can cost tens of thousands of dollars in delays, replacement costs, and schedule acceleration expenses.

Common Misconception

Many contractors think their general liability insurance covers subcontractor defaults, but it typically doesn't. Others believe that requiring bonds from all subcontractors eliminates the need for this coverage, but smaller subcontractors often can't obtain bonds, and bonding doesn't cover all types of default scenarios.

In Practice

A general contractor on a $2 million project has an electrical subcontractor with a $200,000 contract who goes bankrupt with 60% of work complete. The replacement electrician charges $140,000 to finish the work, plus $25,000 in acceleration costs to meet deadlines. Subcontractor default insurance would cover the extra $65,000 in costs, minus the deductible, preventing the general contractor from absorbing this loss and potentially losing money on the entire project.

Etymology

The term developed from construction industry needs in the mid-20th century, combining 'subcontractor' (a contractor working under the main contractor) with 'default' meaning failure to fulfill obligations.

Common Misspellings

Related Terms

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See Also