What is a Surety Bond?
A surety bond is a surety guarantee, issued by an insurance or surety company, which provides financial indemnity in the event that the contractor, sub-contractor or supplier fails to perform their contractual obligations to the main contractor, employer or another contractual party.
Surety bonds can also serve to meet the statuary or regulatory requirements of Government agencies or other regulatory bodies such as HMRC, the environment agency, and local Government authorities.
Most of our work is in the construction sector, providing bonds in support of construction contracts or supply only contracts within the Construction sector most commonly performance bonds, advance payments bonds and retention payment bonds.
Our work is focused upon the insurance/surety sector rather than the banks, who are the other main providers of such guarantees.
To enquire about surety bonds, please contact us.
When Do You Need a Surety Bond?
Many public and private construction projects require a surety performance bond as a prerequisite for the award of the contract or subcontract. The nature of the works or the structure of the contract may also lend themselves to advance payment and/or retention guarantees.
Similarly, the contract may require guarantees to be provided to local authorities for road and sewer works etc.
Therefore, many types of businesses require surety guarantee bonds.
What Parties are Involved in a Surety Bond?
Although often referred to as surety insurance, a surety bond is not a contract of insurance, despite the fact that it is predominantly insurance companies who provide our guarantee bond requirements.
There are three parties involved in a surety bond (with their legal terminology in brackets):
- The party doing the work (the principal)
- The party requesting the work (the obligee)
- The bond issuer (the surety)
In the event that the first party fails to perform their contractual obligations to the second party, resulting in a proven contractual financial loss, the second party requests indemnification payment from the guarantor up to the level of the guarantee bond value
The key difference, when compared with insurance, is the fact that the surety guarantor then seeks reimbursement from the first party.
Fincred IS is a specialist insurance broker helping our clients find suitable and competitive surety solutions through our trusted network of surety and insurance companies.
Example of a Surety Bond
A common type of surety bond is a construction bond. Take a construction project that is awarded by a government agency to a contractor. They might be contracted to build a hospital or road.
To ensure that the building work is completed in an appropriate manner and within a certain timescale, the government agency will request that the construction company (the principal) purchase a surety bond that binds them to complete the work in a compliant manner.
If these obligations are not met, the agency can claim from their surety insurance, and the construction company will be liable to compensate the insurance company.
What Are The Different Types Of Surety Bonds
There are a wide range of surety bond insurance products. It can sometimes be confusing to find a product that is right for you.
Below we give the definition of each type of surety bond. Fincred IS is an expert surety bond broker. If you are looking for help choosing a surety bond for your business, don’t hesitate to contact us.
Performance Bond Insurance
A guarantee under which the guarantor (surety) guarantees to the employer or main contractor that the contractor or subcontractor will fulfil their contractual obligations and if they fail to do so, that the Guarantor will pay the damages sustained by the main Contractor or Employer, as ascertained and established under the contract terms and conditions, up to the value of the Bond which is typically 10% of the contract value.
Retention Bond Insurance
A guarantee which enables the release of the whole of each certified payment to the main contractor or subcontractor including what would otherwise have been the portion retained pending release at practical completion and making good defects.
It Guarantees that the main contractor or subcontractor will fulfil their contractual obligations and that if they fail to do so, that the Guarantor will pay the damages sustained by the main contractor or employer, as ascertained and established under the contract terms and conditions up to the amount of the bonded retention value.
Advance Payment Bond
A guarantee under which the Guarantor guarantees to the Employer or main contractor that contractual payments they have made in advance to the main contractor or subcontractor will be used and applied in accordance with the contract terms and conditions and that in the event of failure to do so the Guarantor will pay the damages sustained by the main contractor or employer as ascertained and established under the contract terms up to the amount of the bonded advance payment value.
Duty Deferment Bonds
A guarantee under which the guarantor guarantees payment of relevant taxes and duties to HMRC, allowing HMRC to offer deferred payment terms to the importer for up to 45 days. This enables the importation and distribution of the goods prior to the payment of the tax and duty, thereby easing pressure on cash flow.
A guarantee under which a party seeking contractual tenders seeks protection against, and compensation for, additional costs, expenses delays and contractual value differences if the successful bidder then fails to enter into the contract in accordance with their tender.
These bonds are very uncommon in the UK and are often required to be payable on demand (rather than after ascertainment of actual loss suffered if any), and therefore are far more likely to be sourced from Banks than from Insurers and surety companies.
Construction Guarantee Bond
A performance bond specifically geared towards the construction sector and certain forms of construction contracts.
Bonds that ensure land will be returned to an agreed state after a project is completed.
Road and Sewer Bond
A guarantee taken out on the behalf of a property developer to ensure roads and sewers are completed to the necessary standards under the Highways and Water Industry Acts.
Need Help Finding The Right Surety Bond?
Don’t take chances when trying to find surety bonds. By using Fincred IS’s surety bond service, you ensure that:
- You will know you are complying with the required laws
- You will have access to a wide range of trusted, reliable providers from our network
- You can maximise your cost/benefit ratio
- You have the advice and backing of a surety expert with decades of experience in the industry
Fincred IS are experts in surety bonds, performance bonds, construction bonds and all other types of surety insurance. We are your partner in insurance and have the best interests of our customers at heart.
If you want to find the best surety agreement for your business, contact us today.
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