Covid-19 (coronavirus) and your business

Confused about how Covid-19 affects your business insurance? Get answers at our Covid-19 FAQ. If you have employees, protect them with Covid-19 Infection Insurance.

Bonds

Provide helps you get the best Surety Bonds for your business, so you don’t have to deal with expensive bank guarantees.

What is a Surety Bond?

Surety bond is a financial guarantee between parties of a contract, with the aim to deliver pre-obligated conditions stipulated under at the agreement at a future date. The obligee (tender party that awards the contract) would want some assurance that the principal (contracted party) would be able to complete the project in time, hence would require the principal to secure a Surety Bond from the Surety (in this case an insurance company) as protection. In any event that the principal fails to meet conditions stated in the contract, the obligee is entitled to claim damages from the Surety for losses associated with performance failure on the part of the principal.

Surety bonds is commonly used as an alternative to bank guarantees, provided the obligee is acceptable to its use. Securing a bank guarantee typically requires the principal to pledge collaterals such as stocks, time deposits, cash and/or personal or corporate director’s guarantees in exchange for it’s issuance. Cash collaterals are often dollar for dollar for the bank guarantee value, meaning to raise a bank guarantee for $500,000, the principal would have to pledge a cash deposit of an equivalent $500,000 with the bank. Premiums charged for a surety bond is a fraction of the bond value, hence businesses often turn to the insurance market for solutions in order to fulfil the project requirement.

Surety bond is a contractual agreement between 3 parties, the principal, surety and obligee. Surety bond is a financial guarantee that binds the principal to deliver agreed conditions in the specified underlying contract to the oblige. In any case that the principals fails to deliver the terms of the contract, the obligee is entitled to submit claims to the principal to recover losses capped to the bond limit.

Obligee

The obligee is the party that requires a surety bond as protection, and they can be corporates, government agencies or individuals. The prerequisite for surety bond is to cover financial damages in the case of a claim, usually in situations whereby the Principal is unable to fulfil its obligations under the contract

Principal

The principal is the party that the obligee requires to take out a surety bond. The surety bond will protect the obligee against any breaches in contract or unethical business practices on behalf of the principal. The principal of a surety bond is typically a business that’s trying to obtain a license from a government agency or bid on a contract.

Surety

The surety is the insurance company that backs the surety bond up to the full bonded amount. The surety provides the financial guarantee to the obligee that the principal will fulfill their obligations outlined in a contract agreement by paying a preagreed premium amount for the coverage

Surety Bonds are commonly used by businesses to protect their interest in a project, and the different types of bonds available in the market are:

  • Bid or tender bond is required by a Contractor during the submission of tenders for contract jobs to the Principal. The main purpose of the Tender Bond is to guarantee that the contractor who is awarded the contract will undertake the contract under the terms at which the contractor has submitted and is capable of providing a Performance Bond thereafter.
  • Performance bond  also known as a contract bond, is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor.
  • Labour and material bond Payment Bond is a type of insurance that is used to guarantee that subcontractors and suppliers are paid for the work and material they supply on the job
  • Advance payment bond is a guarantee for the buyer/principal (beneficiary of the guarantee) that they will be able to claim back all or part of the advance they have paid you as the supplier/contractor (issuer of the guarantee) in accordance with the commercial contract, in the event of non-performance or incomplete performance of the contract.
  • Maintenance bond is a type of surety bond purchased by a contractor that protects the owner of a completed construction project for a specified time period against defects and faults in materials, workmanship, and design that could arise later if the project was done incorrectly

Surety bond is purchased mostly due to the requirements under project tendering process. Upon the award of the contract, the principal is required to have a Surety Bond that covers the Project bond value as stipulated under the contract, usually 10-15% of the Project value.

There may be instances whereby the obligee cannot accept a Surety Bond but instead ask for a Bank Guarantee, and in that case, the principal would have to put up a higher value security in exchange for a bank guarantee. A surety bond which is acceptable to the obligee would usually be a cheaper option as premium charged is a fraction of the project cost, and monies which would otherwise be put up as collateral in exchange for a bank guarantee can be used as working capital for the project.

  • Construction & other businesses with government-issued licenses
  • Construction companies with government projects over $100k
  • General contractors who are bidding on new projects
  • Businesses in high-risk or high-tax sectors, such as alcohol and tobacco
  • Businesses that need to insure customer property, such as auctioneers
  • Companies that want to protect themselves against employee theft
  • Companies that expect to face litigation in the near future

The percentage of the total bond amount you pay is based on a handful of factors, including your credit score, the type of bond, your company’s financial strength, verification of assets, and your experience in the industry, and your past claims history.

The surety will assess the principal based on the above factors in determining the possibility of a claims. Insurance company will evaluate the cost of insuring the principal for the underlying project based on its past experience in handling similar projects, its financial strength to complete the project based on its balance sheet. Insurers will also look at the owner experience to handle the project and their credit score. A poor credit score will indicate inability to perform its obligations under the contract, making it more costly to issue a Surety bond as the possibility of a bond call is higher.

Curious about how much you could save with Provide? Get started on a quote, or get free advice from our industry experts today.

Prefer to speak to a consultant? Call us at 6977 7130

Leave us a message - we'll get back to you ASAP.​

  • This field is for validation purposes and should be left unchanged.