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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 is a third party guarantee.

Surety bonds are guarantees issued by Surety or Insurance Companies on behalf of a Principal in favor of a Beneficiary (also sometimes referred to as an Obligee). The surety bond guarantees fulfilment of a contract obligation up to the bond amount. The surety bond protects the beneficiary against the Principal’s default of its obligations.

Surety bonds are normally required under the terms of a construction or engineering contract, or in accordance with mandatory legal requirements.

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.

The most common types of surety bonds are:

– bond   related to construction and/or supply of equipment contract (bid bonds, performance bonds, advance / prepayment bonds, and warranty or maintenance   bonds.

– customs  and tax bonds- concession and license bonds

– judicial bonds

– bonds related to purchases of goods and/or services

– lease bonds

There are hundreds of different bond types depending on the country or region.

Surety bonds have their own characteristics and can differ from market to market / country to country. Some countries have regulated contract and surety bond forms while other countries have bespoke bond forms.

Bonds in Europe, Latin America, and Asia tend to have a low-penalty amounts, limited to 5 or 10 % of the contract value as a means to recover costs incurred, surety bonds in the United States are typically 100% of the bond value.

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.

In certain countries, rates are filed. In other countries, there are no rate filings for surety bonds. Rates are usually determined by various factors considered in the underwriting analysis, including but not limited to the Principal’s financial strength, the likely volume, and the individual bond terms and conditions.

A surety bond protects the Beneficiary against the default or insolvency of the principal up to the amount  mentioned in the bond, which (in international bonding environment) is usually a low penalty percentage compared to the overall contract value. 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.

Typically, Sureties work through agents or brokers. Sureties have their own applications and information requirements.

Sureties usually require audited accounts, up-to-date management accounts, outlook information and  banking information.  Bond application forms can be accessed on the website of most Sureties. All information provided is treated in the strictest of confidence.

Telephone, e-mail and address contact details from Surety insurance companies worldwide can be found under the member section of the www.icisa.org website.

All applications for a surety facility are reviewed by an experienced surety 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, the Surety may decide that the customer does not meet its underwriting criteria.

In case of a new relationship, the Surety needs to perform a full underwriting assessment, which, depending on complexity, may take a couple of days or weeks to be completed and the facility or indemnity agreement to be signed and executed. Once the facility or indemnity agreement is signed, the process for bond issuance can be the same day or a few days depending on the complexity of the bond being requested.

Surety bonds are typically conditional whereas bank guarantees are on demand. There are certainly surety bonds that are pay on demand. While a bank guarantee or letter of credit can tie up a company’s credit capacity, a surety bond usually does not.

From an accounting perspective, surety is treated as a contingent.

Although in many countries, banks have been traditionally used for guarantees, the bond provided by a Surety has proven equally acceptable. This has allowed many companies to set up separate with Sureties. By doing so, these companies protect their lines of credit with banks, which might otherwise limited.

Since surety is credit based, the financial standing of the customer must be carefully assessed. Besides a diligent financial review, sureties will also want to underwrite the company’s operations and future strategy. Sureties will typically meet with customers to better understand their businesses as sureties look to for long term relationships.

Once a facility is in place, although regular contact is maintained, no further information is normally required until the annual facility review and bonds can be issued with the assurance that a thorough credit assessment has taken place. On more complex bond requests, the Surety may ask for underlying project and contract information.

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