Basis of guarantee obligation

This post is part of a series sponsored by Old Republic Surety.

What is the difference between a surety bond and insurance?

This is a commonly asked question and a good starting point for the discussion. Knowing these differences can help contractors understand why they are needed. both Products. It will outline the limitations of traditional insurance coverage and why Old Republic Surety is a company worth considering if you need a construction bond.

In some ways, insurance and surety bonds are similar. Both are types of coverage, usually written by an insurance company. In both cases, the insurance company assumes a risk and charges a premium for that risk. Both protect against financial loss.

Two Parties vs. Three Parties

However, there are some big differences:

• Insurance is a two-party contract between the insured (the policyholder) and the insurer (the insurance company). The insurance contract provides for the payment of a benefit to the insured against a covered loss.
• A surety bond is a three-way agreement between the employer (contractor), the guarantor (the debtor) and the creditor (the project owner or local government). The guarantor guarantees that the employer will fulfil its obligations to the creditor, i.e. complete the work and pay subcontractors and suppliers.

Guarantee losses are borne by the principal debtor

In an insurance contract, the insurance company is obligated to fully compensate the insured in the event of a claim. In a guarantee obligation, the principal assumes this obligation. If the principal defaults on the obligation, the guarantor fulfills its obligations to the creditor and seeks repayment from the principal.

Insurance companies expect to incur losses on the insurance policies they issue. Surety companies do not expect to incur losses when they issue bonds. Any Loss. The guarantor pre-certifies the principal to the extent that he is expected to fulfill his contractual obligations. The economic risk is borne by the guaranteed principal.

The insurance company does not receive compensation for losses under the insurance policy, whereas the guarantor has an indemnity agreement with the principal that guarantees that the principal will reimburse the guarantor in the event of losses paid on behalf of the principal.

Similar to banking

Another way to look at a guaranteed debt is as an extension of credit, similar to a bank loan. The bank does not expect to incur losses as a result of the loan agreement with the borrower. In the event of default on the loan, the bank has the right to seek repayment from the defaulting borrower.

Similarly, the guarantor provides the principal with the benefit of his creditworthiness. If the principal defaults, the guarantor is entitled to compensation.

Indemnification Agreement

Many contractors are unfamiliar with the concept of indemnification, which is an integral part of the surety process. An indemnity agreement protects the guarantor if the prime contractor defaults on the project. It is a separate contract between the prime contractor and the guarantor that ensures that the guarantor receives all payments from the guaranteed prime contractor. The indemnifier (prime contractor) assumes full liability and gives the indemnified party (guarantor) legal protection in the event they have to make payments. Claim About bonds.

The majority of the principal owners will be parties to the indemnification agreement. It is possible that the owners and their spouses will also need to be indemnified, especially if the underwriting of the bond is based on the creditworthiness of the owners. In most cases, both corporate and personal indemnification are required. In addition, indemnification may also be required for affiliates or related companies.

Better accounting leads to better bond prices

Another difference between a guarantee obligation and insurance is the level of financial information required from the primary obligor in order to assume the obligation.

Smaller contractors may face difficulties in providing the accounting information required by sureties. Certified Public Accountant with construction industry experienceA CPA will help you prepare financial statements, including progress reports with schedules for completed and uncompleted projects.

Accounting is important because it affects a contractor’s balance sheet. It determines the size of the bond a contractor can get and the price it will receive. Without detailed financial information, a contractor will be limited in the projects they can undertake. Some contractors rely on credit-based bonds that are tied to their personal credit.

Old Republic Surety helps contractors grow by improving their financial presentations. We meet with them and explain how accounting impacts their balance sheet. I know several clients who have carried over from credit-based programs (Fast Bond) Standard Program.

Unlike most insurance, surety is a relationship-driven business. We really know our customers. Visit the owner As Managing Partners, we are there to help. It’s a relationship built on loyalty to one another. Getting our clients to understand the basics of construction bonds is just the beginning. Contract claimsor to find an Old Republic Surety appointed agent near you, Contact your nearest branch.

This blog was originally Old Republic Surety websiteReprinted here with permission.