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Industries

Surety

Surety Bonds

Bonds and guarantees are normally required under the terms of a construction or engineering contract, or in accordance with mandatory legal requirements, to secure the obligations of the principal debtor (generally known as the principal) against the beneficiary.

They guarantee the performance of a variety of obligations, from construction or service contracts, to licensing and to commercial undertakings. Almost any sale, service or compliance agreement can be secured by a surety bond.

A surety bond is an agreement, issued by an insurance company, which (in most cases) provides for monetary compensation in case the principal fails to perform. Although many types of surety bonds exist, the two main categories are contract and commercial surety.

For more information, please visit the surety Frequently Asked Questions.

Where is Surety available?

Here is an overview of countries where ICISA’s trade credit insurance and surety members offer their products. Click on each picture to see it on better resolution.

ICISA Members in Americas scaled 1
ICISA Members in Asia Australasia scaled 1
ICISA Members in Europe scaled 1
ICISA Members in Africa MENA scaled 1
Glossary of Surety terms

A surety bond provides assurance to one party that the obligations of another will be met. A surety is a specialist insurer providing this essential security in a range of industries and scenarios.

Go to Glossary
FAQ

Below you will find frequently asked questions on TCI related topics. If you have any additional questions please feel free to contact secretariat@icisa.org.

Surety bonds or guarantees secure the fulfilment of a contract or an obligation up to the limit of the bond. They protect the beneficiary against acts or events which impair the underlying obligations of the so called “principal”. Underlying obligations can either be negotiated or can have a statutory (legal) character.

Surety bonds guarantee the performance of a variety of obligations, from construction or service contracts, to licensing, to commercial undertakings. Almost any sale, service or compliance agreement can be secured by a surety bond.
Bonds and guarantees are normally required under the terms of a construction or engineering contract, or in accordance with mandatory legal requirements, to secure the obligations of the principal debtor (generally known as the principal).

A surety bond provides the security to protect the creditor against the default or insolvency of the principal up to the limit of the bond. For example, the failure of a contractor to complete a contract in accordance with its terms and specifications or the failure of an enterprise to pay taxes or customs duties to a government or department.

They play a vital part in domestic and international trade and in particular protect taxpayers against the loss of public funds.

The secured contractual obligation can have many forms e.g. constructing a building or being compliant to legislative regulations.

Examples:

  • The failure of a contractor (principal) to complete a contract in accordance with its terms and specifications.
  • The failure of an enterprise to pay taxes or customs duties to a government or department (beneficiary).

The most common types of surety bonds can be categorised as follows:

  1. customs, tax and/or similar bonds
  2. bonds concerning concessions and licenses
  3. judicial bonds
  4. bonds concerning purchases of goods and/or services
  5. bonds concerning leases
  6. bonds concerning construction and/or supply contracts
  7. financial bonds

But there are many types of other bonds as well.

Surety bonds are especially useful in the construction of public works. The vetting of a contractor’s ability to complete a given project is often far too cumbersome or expensive a task for government agencies. The surety industry has facilitated countless government works projects, delivery contracts, public private financing initiatives and build-own-operate-transfer arrangements, while at the same protecting the taxpayer’s money. Other types of surety bonds include customs or tax bonds, bonds concerning concessions or licenses, judicial bonds, bonds concerning leases and bonds concerning the delivery of goods or services.

There are no fixed rates. Each case is reviewed upon its own merits. The rate applicable will be determined by reference to all the factors considered in the underwriting appraisal but primarily the financial strength and the likely volume and nature of the bonds.

A surety bond provides the security to protect the creditor against the default or insolvency of the principal up to the limit of the bond. For example, the failure of a contractor to complete a contract in accordance with its terms and specifications or the failure of an enterprise to pay taxes or customs duties to a government or department.
They play a vital part in domestic and international trade and in particular protect taxpayers against the loss of public funds.

Surety bonds and guarantees are drafted to suit your needs. This makes them unique for each customer. The result is a custom made policy at a price that you can afford.
Surety insurers will provide further details without any further obligation. Telephone, e-mail and address contact details can be found under the products section of this website.

The insurance company usually needs audited accounts, up-to-date management accounts and details of your banking information.  Bond application forms can be accessed on the website of most surety insurers.  Applications are reviewed swiftly and all information provided is treated in the strictest of confidence.

All applications for a surety facility are reviewed by an underwriter. Applications must meet the underwriting criteria in order for terms to be offered. In some cases a facility may only be offered subject to the satisfaction of additional conditions. In some cases it may, unfortunately, not be possible to offer a policy.

Surety bonds are typically conditional whereas bank guarantees are on demand. Only the performance risk lies with the surety, where the bank has the financial risk on the construction project.

Accounting wise, surety is accounted for as a liability like other insurance products whereas credit risks in a bank by nature are accounted for on the asset side.

Although in many countries originally banks mainly issued bonds, the security provided by an insurer has proven equally acceptable. This has enabled many enterprises to set up separate lines of credit and bonds with surety or insurance companies. In doing so, they protect their lines of credit with banks, which might otherwise be blocked at such time when this working capital was needed. Banks usually prefer to issue so-called “on demand” bonds and must therefore treat them as un-presented letters of credit.

Unlike traditional insurance, sureties do not undertake to spread risk but rather to pre-qualify and rigorously select their principals.

As a surety facility is a line of credit, your financial standing must be assessed. Rigorous underwriting criteria mean that your business needs to be understood, which involves fully reviewing audited accounts up to date management figures and banking information.

Once a facility is in place, although regular contact is maintained, no further information is normally required until facility review and bonds can be issued with the assurance that a thorough assessment has taken place.

Any questions on the topic?

If you want to know more about this topic, feel free to contact us.

ICISA Secretariat
ICISA Secretariat
secretariat@icisa.org
+31 20 625 4115