Glossary of Surety Terms

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A bond is a written Document issued by a Surety guaranteeing to the Beneficiary that the Principal/Contractor will fulfill its guaranteed obligations. The liability of the Surety is accessory/conditional to the liability of the Principal/Contractor for the guaranteed obligation. On the Principal's Default, the Surety undertakes to pay or satisfy any claim up to the Bond Amount/Penal Sum - at the Surety's option - to perform the contract or any Contractual Obligation. If upon default the Surety makes payment to the Beneficiary or performs the Contract, the Surety has a right of recourse against the Principal.

Conditional in the context of this definition means that the Bond is accessory to an underlying contract or guaranteed obligation. Surety Bonds can be based on national Surety Law or Insurance Law.

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Brazilian Judicial Bonds
Guarantee the Court during the period of legal proceedings of payment of the indemnity at the end of the process. Product serves as alternative of other Court Guarantees (LoC, Assets, Cash). Depending on the type of Lawsuits: Civil. regulatory disputes, fines and penalties disputes between parties. Less common Tax. Mayority of the judicial bonds are related to tax litigation (movement of goods, income tax, charges social security, tax on services). Brazil complex tax systems boost the demand for bonds. Usually long duration high amount of labour. Labour disputes between employers and employees. Shorter duration in general lower amounts


Completion bond
Conclusion of the construction phase of the project enabling the Principal to repay the project finance amount.
Concession bond
A Concession Bond covers all obligations of the concession contract (in accordance with the timetable). The concession bond can guarantee the recovery, improvement, maintenance, conservation and operation of existing facilities but it can also guarantee the creation of a complete new infrastructure. In some cases the bond might also cover the onus payment (the concession fee) however this should be a small part of the total obligations.


Efficiency Bond
Accessory to a purchase contract related to "machinery" (machinery, material goods, implantation). Cover relates to the specified technical performance of the respective "machinery" compared to a defined benchmark.


Facultative Reinsurance (in Surety Bond Business)
Facultative Reinsurance is negotiated, agreed and documented separately from (potentially) existing reinsurance treaties per surety bond to be issued / project to be reinsured. Facultative reinsurance is purchased by sureties (surety bond insurers) for surety bonds (or fractions of them) which the insurer cannot or does not want to bear alone. Within existing reinsurance treaties this can happen if the amount of the bond(s) exceeds the treaty limit or if the cover provided with the bond is excluded. The surety is free to decide if he wants to offer the facultative cover to the reinsurer which in return is free to accept or decline it based on his individual analysis (contrary to the typically obligatory cessions within a reinsurance treaty). As the surety has more proximity to the risk offered, the analysis of the reinsurer needs to be supplemented by a noticeable ‘alignment of interest’ between him and the surety: The surety’s retention must be high enough to ensure his interest in the business.

Click here to go to ICISA-PASA Questionnaire for Bonds / Guarantees

Fiduciary Bond
Fiduciary bonds cover the obligations related to the administration of a third party’s assets held in trust. Fiduciary bonds cover the ultimate beneficiary against the risk of misappropriation of his/her/its assets (deliberate intention, covered under fidelity) only or in combination with the faithful performance of fiduciary responsibilities (negligence, covered under profesional indemnity).
Financial Guarantee
A Financial Guarantee is understood as comprising any bond, guarantee, indemnity or insurance, covering financial obligations in respect of any type of loan, personal loan and leasing facility, granted by a bank/credit institution, financial institution or financier, or issued or executed in favour of any person or legal entity in respect of the payment or repayment of borrowed money or any contract transaction or arrangement - the primary purpose of which is to raise finance or secure sums due in respect of borrowed money.

Click here to read the ICISA article on financial guarantee


Guarantee (see Art. 5 URDG 758)
A Guarantee is by its nature independent of the underlying relationship and the application, and the guarantor is in no way concerned with or bound by such relationship. A reference in the guarantee to the underlying relationship for the purpose of identifying it does not change the independent nature of the guarantee. The undertaking of a guarantor to pay under the guarantee is not subject to claims or defenses arising from any kind of relationship other than a relationship between guarantor and beneficiary. Typically, no specific "Guarantee Law" exists.

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Housing bond (type advance payment bond)
Refund of the deposit in case the dwelling is not handed over in timeHousing bonds are used for money put down as deposits on dwelling purchases, paid to private building developers. This type of bond guarantees the refund of the advance payments to the individual purchasers, in case the dwelling is not handed over on time.
Housing Bonds France – CMI Constructeurs de Maisons Individuelles
Related to the CMI (Construction de Maisons Individuelles / Construction of individual houses) it is required by the French Law (Law of 1990) that the constructor provides to the buyers a bond that protects them against the risks of non-execution or bad execution of the works envisaged in the sales contract by ensuring that the construction project will be well carried out in accordande with the deadlines indicated, while respecting the initally fixed price.
In case of failure of the constructor, the guarantor is legally obliged to deliver houses to the agreed price in sales contract and take over the role of the constructor by appointing another one to end the house.
Penalties of delay and cost exceeding, with the exception to a maximal of 5% deductible are covered by the bond.
Housing Bonds France – GFA Garantie Financière d’Achèvement
The GFA, Garantie Financière d’Achèvement (Financial Guarantee of Completion) is a legal requirement in France for the "protected sector", referring to housing. For other types of construction it's non mandatory but often contractual. It is a bond that guarantees completion of the project to the buyer of a property on VEFA (Vente en l’Etat de Futur Achèvement /Sale in the State of Future Completion) in case of default of the builder. The Guarantor is jointly and severally liable with the promoter, and in case of default, would have to provide the outstanding financing for achievement of the project completion. The guarantee only concerns works still to be carried out and cannot be used to pay companies for work already carried out and not paid for by the promotor. "The guarantor does not cover any financial loss of the buyer, it takes care of the work completion and provides the missing financing if needed"


Indemnity Agreement

The indemnity agreement is the formalisation of a right of recourse. Recourse to the obligor (principal / risk) for losses is a fundamental characteristic of any surety product. This right is typically established by law and can be formalized either in the surety contract or in a separate agreement. To strengthen its enforceability, the right of recourse can be modelled to allow immediate drawing without prior discussion and/or to protect against the obligor’s insolvency (by pledging of company assets or the right to require it under certain circumstances as well as by adding third party counter indemnities).

The indemnity agreement is an essential element of the “zero loss UW” approach, securing the right of recourse.


Joint Venture
A joint venture (JV) is a business arrangement in which two or more parties (typically two independent legal entities) agree to pool their resources for the purpose of carrying out an economic activity together. A Joint Venture is usually created for a finite period of time, for one (or several) particular project(s). The Joint Venture partners may retain their individuality in which case each partner is responsible for profits, losses and costs associated and is typically jointly and severally liable to the owner / obligee / beneficiary. A Joint Venture can also be incorporated as a limited liability company or similar partnership (e.g.: LLC, General Partnership, Limited Partnership) where the shareholders’ responsibility to the owner / obligee / beneficiary is limited to their investment or contribution to the JV. This latter type of Joint Venture is normally referred to as a Special Purpose Vehicle (SPV).

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Judicial Bonds
Judicial bonds are all bonds required in judicial proceedings. The bonds guarantee the litigants obligations in front of the other parties involved, the other litigant and/or the Court. Generally those obligations could be the payment of the costs related to the legal action, the payment of a veredict, etc Mainstream characteristic for such bondsfulfill / comply with the financial consequence of a judgement Two parties are in court and the bond shall secure that the financial consequences of a final ruling at a later point in time can be fulfilled. Most common judicial bonds are related to civil, labor or tax proceedings.


Permuta Bond
Construction of a real estate complex and cession of a fraction (usually pre-established units) to the previous land owner in compensation for the transfer of the land. The Contract of "Permuta" is one where no money is involved. The owner of the land cedes the land to the constructor/real estate company so that they might build there. After the project is completed, the constructor/real estate company will cede the rights of some pre-established units to the owner of the land.
Pre-retirement Bonds
The German "AltersteilzeitGesetzt" allows a cost-neutral early leave for employees nearing the legal retirement age. The scheme splits the final phase of employment during a total period of 5 to 7 years into two even parts: Starting with an active phase, the employee continues to work normal hours, albeit at a reduced salary, thereby generating a credit to the employer. Until the legal retirement age, the employee then continues to receive the reduced salary during the subsequent passive phase without working any further. Until 2009 such schemes were incentivised for employers in terms of tax and social contributions. The bond is a legal requirement to protect the credit generated by the employee from the insolvency of the employer. Beyond salary payments, cover also comprises collateral charges to tax authorities and social security bodies.


Standby LoC (see UCP 600, ISP98, US UCC)
A Standby Letter of Credit (SBLC / SLOC) is an irrevocable documentary guarantee that is made by a bank on behalf of a client ("applicant"), with the security purpose to ensure payment will be made in case the client is not fulfilling the payment or any other obligation due (drawing event occurred). It is a payment of last resort from the bank, and ideally, is never meant to be used. To be stressed that this is the motivation, however the trigger is the "complying presentation" (e.g. right place and time) of all predefined documents only. Rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary. Typically, no specific law exists. The UCP 600 and ISP 98 rules are applicable when the text of the SBLC expressly indicates this. The rules supplement the applicable law to the extent not prohibited by that law. Choice-of-law clause typically are recognized by courts. Otherwise, a court will likely apply its own "conflict-of-law" rules which typically stipulate, that the indicated place of issuance determines what law governs the issuer's obligation. (cf. notes 2 and 19 of ISP 98 Model Form)

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Swedish Pension Bond
Employees in Sweden under ITP 2 plan, which is a "defined benefit" plan, are entitled to a guaranteed pension. Instead of paying premiums to a mutual life insurance company (ALECTA), it is not uncommon that especially larger companies keeps the pension capital within the business and use the funds as long term financing in their operations. Some companies also place premiums in a pension fund (NCC, Ericsson etc) The future pension obligation is booked as debt in the balance sheet and the actual pension payments occur once employees are actually retired. This way the company can keep the funds within their business. The guarantee is to cover their ITP2 plan pension debt and costs associated with the possible redemption of the pension debt.


WGA Guarantee – Dutch WGA
Background: Employers in The Netherlands are financially liable for employees that become partially disabled or temporarily full disabled during their employment. This is regulated by the Dutch regulations WIA and WGA. Employers are obliged to insure themselves for this liability in case of insolvency in one of the following ways: 1) Insure publicly (via governmental body UWV); 2) Insure privately; 3) Become own-risk bearer for payment of disability benefits for partially disabled (35- <80%) or fully, but temporarily disabled (80-100%) employees (For permanent fully disabled workers another Dutch scheme, the IVA applies.) For option 3 above, the employer needs to provide a so-called WGA guarantee to the Dutch tax authority, to cover disability benefits in case the employer becomes insolvent.


Zero Loss Underwriting Principle
The underwriting of traditional insurance is based on the law of large numbers delivering frequent losses (at a more or less expected level) on a portfolio of risks of similar structure. In contrary, the underwriting of surety bond business is based on a “Zero Loss Philosophy” for underwriting individual risks. Notwithstanding, surety bond portfolios do have losses, but with a low frequency. Due to the size of surety portfolios and the heterogeneity of risks, severity of losses is higher than in insurance portfolios.

If you have any question or suggestion related to the Surety Glossary of Terms, please feel free to contact ICISA Secretariat.

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