Surety Bonds and Guarantees
Letters of guarantee ensure that suppliers can meet their financial obligations when contractual performance targets are not met. Many large projects are impossible without them.
Howden consultants take the stress out of the whole process, from successfully aligning with the terms of the contract to managing the claims process and defending you.
A guarantee is a contract between three or more parties: a supplier of some kind, its customer and an insurance company (letters of guarantee are also available through banks, but banks tend to be less flexible in their terms and the guarantee is on your balance sheet while the insurance company's guarantee is not).
The three parts are as follows:
- The principal (holder of the bond)
- The obligor (the bondholder's client)
- The guarantor (the insurance company)
It is the job of Howden's risk consultant to ensure that the wording of the guarantee closely meets the performance requirements set out in the contract.
The letter of guarantee is not an insurance policy; the guarantor will seek to recover the funds, as well as any legal costs, from the principal.
How are premiums calculated?
Premiums are calculated according to:
α) The requirements contained in the contract, service agreement, purchase order, notice of progress, etc.
b) The financial situation of the principal (solvency must be verified)
(c) The loss/claims history of the principal.
(d) The total amount for which the guarantor could potentially be liable in the event that the principal defaults.
Howden will work with you to ensure that your business is presented in the best possible way in order to secure the most favourable terms.
What happens in the event of a claim?
In case of default, the guarantor will conduct an investigation.
If the claim is valid, the guarantor will pay the debtor what is due.
The guarantor will then turn to the principal debtor, requesting reimbursement of the amount paid (plus any court costs).
In cases where the principal blames a third party for causing the default, the guarantor will investigate and will have a right of subrogation. In this way, he can "put himself in the shoes" of the principal and seek compensation to recover his losses.
Do letters of guarantee work like traditional insurance policies?
A letter of guarantee is not a typical insurance policy. While the guarantor backs the principal's performance and will pay the penalties resulting from non-performance or inadequate performance, it seeks to reclaim the funds from the principal.
A letter of guarantee helps to effectuate the agreement. Obligors can enter into a contract knowing that performance is guaranteed or that any penalties will be paid in any event.
What happens in the event of a dispute?
The guarantor is usually not the best person to resolve legal disputes between the principal and the debtor. Sometimes he will try to mediate disputes before they develop into disputes and breaches of contract. Ultimately, all parties to the agreement want to avoid this.
If there is a legitimate dispute between the principal and the obligee, the surety is usually unable to resolve it. This does not mean, however, that the surety will ignore a dispute about the project. Disagreements can become disputes. Disputes can turn into breaches of contract. Breaches of contract can become defaults warranting termination of the contract. Everyone involved in the warranty process is invested in preventing this from happening.
As Howden has pre-arranged facilities, we can expedite decisions and offer you a fast turnaround time.