Surety Bonds & Guarantees
Surety bonds guarantee that suppliers can meet financial obligations when contracted performance targets are missed. Many major projects are impossible without them. Howden consultants take the stress out of the entire process, from successfully aligning with the terms of the contract, to managing the claims process and advocating for you.
A surety is a contract between three or more parties: a supplier of some kind, their client and an insurance company (surety bonds are available through banks also, but banks tend to be less flexible in their terms and the bond exists on your balance sheet, whereas the insurance company’s surety does not).
The three parties are:
- The Principal (bondholder)
- The Obligee (bond holder’s client)
- The Surety (the insurance company)
It is the Howden risk consultant’s job to make sure the wording of the surety tightly meets the performance requirements laid out in the contract.
Surety bond is not an insurance policy; the surety will seek to reclaim the funds, plus any legal fees, from the principal.
How are premiums worked out?
Premiums are assessed according to:
a) The Requirements found in the contract, service agreement, purchase order, notice to proceed etc.
b) The financial health of the principal (solvency must be verified)
c) The loss/claims history of the principal.
d) The total sum that the surety could potentially be liable for, in the event that the principal defaults on the obligations
Howden works with you to ensure your business is presented in the best possible light, in order to secure the most favourable terms.
What happens in a claim?
In the event of a default, the surety will investigate.
If the claim is valid, the surety will pay the obligee what they are due.
The surety then looks to the principal, seeking reimbursement for the amount paid (plus any legal fees).
In cases where the principal is blaming a third party for causing the default, the surety will investigate and have a right on subrogation. In this way, they can ‘step into the shoes’ of the principal and seek to recover damages to recover their losses.
Do surety bonds function like traditional insurance policies?
A surety bond is not a typical insurance policy. While the surety backs the performance of the principal and will pay the penalties resulting from non-performance or under-performance, they do seek to reclaim the funds from the principal.
A surety bond helps make the deal happen. Obligees can enter into a contract knowing that performance is guaranteed or that any penalties will definitely be paid.
What happens in a dispute?
The surety is not usually best placed to resolve legal disputes between the principal and the obligee. They will sometimes try to mediate disagreements before they become disputes and breaches of contract. Ultimately, everyone involved in the deal wants to avoid that.
If there is a legitimate dispute between the principal and obligee, the surety is not normally in a position to resolve it. That does not mean, however, that the surety will ignore a project disagreement. Disagreements can become disputes. Disputes can become breaches of contract. Breaches of contract can become defaults that justify termination of contracts. Everyone involved in the surety process is invested in avoiding that progression.
As Howden has pre-agreed facilities, we can drive expedite decisions and offer you a fast turnaround time.