What is Surety Bond?

10 Sep
what is surety bond

What is Surety Bond?

What is Surety Bond?

Surety Bond enables companies to issue Letters of Guarantee through an insurance plan. An insurance plan guarantees the fulfillment of a series of obligations from construction or service contracts, to the normal operations of commercial enterprises.

A very important problem we faced – and still facing – during the years of economic crisis was – and still is – the difficulty of financing, as well as the high interest rates from the banks. This fact resulted in the postponement or cancellation of the development / technical projects, but also problems brought by insolvent partners and customers. During the years of economic crisis, since bank financing was almost impossible, alternative sources of financing for such projects emerged, such as bonds, venture capital companies or insurance companies.

Surety Bonds contain three (3) parts:

  • Guarantor (Insurance Company)
  • Beneficiary
  • Insurance Recipient (Insured).

The Guarantor undertakes to the Beneficiary to cover the loss that may result from the weakness of the Insurance Recipient.

Through Surety Bonds, a business can be insured for a certain period of time, up to a certain amount, which the insurance company undertakes to pay to the beneficiary, in case the insured company is unable to fulfill the obligations it has assumed against it, against a predetermined premium. Giving an example: A technical company undertakes the completion of a technical project through a contract. The technical company (Insurance Recipient), concludes an insurance contract (insurance contract) with an insurance company, which issues a letter of guarantee with which it undertakes for a certain period of time and up to a certain amount, to cover the project owner (Beneficiary) for any damage resulting from the improper execution or non-performance of the obligations of the technical company.

Internationally, the submission of letters of guarantee is a basic condition for a company to participate in tenders and the ability to undertake projects or provide services on its part. The purpose of the letter of guarantee, through guarantee insurance, is to ensure the fulfillment of the obligations of the company arising from the contract, in case the company is in weakness. Letters of guarantee are issued in conjunction with the insurance of the insured’s assets, in order for him to enjoy full coverage. Nevertheless, there are cases in which it is not necessary to mortgage a fixed or current assets of a company, contrary to what is customary to date through banks.

Which industries need Surety Bonds?

Through Surety Bonds, branches that are mainly insured are:

  • Construction Sector
  • Tourism industry
  • Food and beverage industry
  • Trade of electrical appliances
  • Pharmaceutical industry
  • Clothing trade

There are various types of Surety Bonds contracts, such as:

Surety Bonds under Contracts:

  • Participation in a Competition (Public or private sector)
  • Withdrawal of Advances
  • Good Project Execution
  • Maintenance / Good Operation

Surety Bonds in the Context of Commercial Transactions

  • Good Payment.
  • Tax & Customs Duties.

Surety Bonds Categories:

  • Contract Surety Bonds, used mainly in building and construction projects ensuring their execution and meeting the obligations of the company to certain subcontractors, workers and suppliers of materials.
  • Commercial Surety Bonds, which ensure the normal operations of commercial enterprises and the execution of the obligation or commitment.

What are the advantages of Surety Bonds?

  • Guarantee Insurance provides better credit terms as well as easier and smooth operation of businesses
  • As a means of guarantee, it is an innovation in the field with great international acceptance
  • As a process it provides less bureaucracy, as well as is not so complex
  • Possible existing bank lending is not affected as long as the bank is not involved somewhere
  • The premiums paid for guarantee insurance are usually cheaper compared to the cost of issuing a bank guarantee
  • The insurance company does not oblige the company to mortgage its assets for the issuance of a letter of guarantee, except in rare cases

Globally, 25% of letters of guarantee are issued by insurance companies, with guaranteed funds of over 900 billion euros. In our country, however, letters of guarantee are issued almost entirely by banks. In the age of globalization in which we live and operate and following the legislation in force from 2018, according to 4412/16, legal letters of guarantee can be issued not only by banks but also by insurance companies.

Sources: Interamerican

In Delta Insurance Consultants, we cooperate with a variety of insurance companies that are also active in Surety Bonds. Thus, we can provide you the opportunity to issue a letter of guarantee directly through an insurance company, which will accompany your contract, according to the desired coverage limit and the best possible terms.

For more information, contact us.