Proactive Risk Management in Construction: Navigating Subcontractor Defaults and Builder’s Risk Losses

By JOSEPH CASTELLANO

The construction industry is facing a wave of uncertainty.

A significant increase in subcontractor defaults and a consistent rise in builder’s risk claims have reshaped the risk landscape, demanding a proactive and informed approach to construction risk management. Understanding these trends is crucial for owners, developers, GCs and lenders alike.

Subcontractor Default Trends on the Rise

According to the 2024 AGC/FMI Risk Study, nearly 70 percent of construction risk managers reported increased subcontractor distress or defaults in late 2023, with half of respondents experiencing actual project disruptions due to these issues.

One area of particular concern is the electrical subcontractor sector. AXA XL noted a 15 percent to 18 percent rise in defaults in this trade alone within 12 months, following a 58 percent spike in claim notices from 2021 to 2022 (NFP).

Key Drivers Behind Subcontractor Distress

• Financial Fragility: The financial health of subcontractors is deteriorating. Since 2020, net margins dropped 38 percent across all trades, and by 50 percent in electrical. Days of cash on hand declined by 37 percent to 48 percent.
• Macroeconomic Pressures: Subcontractors are squeezed by rising interest rates, escalating material prices and labor shortages. Payment delays now average 56 days, far exceeding the GC-expected 30 days.
• Economic Disruption: Anticipated 2025 construction tariffs and material cost escalation are impacting the subcontractor default insurance (SDI) market. Insurers are introducing tariff-indexed products and enforcing stricter underwriting requirements.

Understanding Builder’s Risk Loss Trends

While inherently unpredictable, the most common types of builder’s risk losses, based on recent industry data and claims trends, fall into distinct categories:

1. Fire Losses (Most Severe & Costly): In 2023–2024, fires accounted for 50 percent to 70 percent of total claims by dollar value in wood-frame builder’s risk projects.

Key Sectors Affected: Wood-frame, mid-rise residential and multifamily projects. 

2. Severe Weather Events (Wind, Hail, Tornado, Flood): Builder’s risk claims stemming from convective storms (wind/hail) have significantly spiked over the past five years.

Key Sectors Affected: Commercial, institutional and civil projects. 

3. Water Damage (Non-Weather Related): This represents one of the most frequent drivers of “small-to-medium” claims in builder’s risk.

Key Sectors Affected: All project types, particularly interior build-outs. 

4. Structural Collapse / Defective Work: Though less frequent, these incidents are high-severity when they occur.

Key Sectors Affected: Large-scale civil and industrial projects. 

5. Theft & Vandalism: While individual losses are often smaller, their cumulative impact can be substantial, especially in urban or remote project sites.

Key Sectors Affected: All project types, particularly those in urban areas. 

Why You Need Construction Claim Experts

In both builder’s risk and subcontractor default insurance (SDI) policies, a commonly overlooked but crucial element is the Claim Preparation Costs clause. This reimburses the general contractor or insured party for reasonable costs related to:

• Investigating and quantifying the loss
• Calculating project delays and damages
• Preparing and presenting the claim effectively to the insurer

Retaining a construction claims expert early in the process ensures accurate documentation, improves the chance of full reimbursement and helps expedite the resolution.

Conclusion

The construction industry’s evolving risk profile – driven by financial pressures, macroeconomic uncertainty and increasing claims activity – requires firms to stay ahead of potential exposures. Whether you’re confronting electrical subcontractor defaults, builder’s risk fire losses or preparing for insurance claim reimbursement, having the right guidance is essential.

Joseph Castellano is managing director of claims, disputes and forensics at LitCon, a Vertex Company Group.