Frequently Asked Questions - Answers
Surety Bonds - FAQ's - Answers
What is a surety bond?
A surety bond is a guarantee whereby one party (the surety) undertakes to pay the direct loss suffered by a second party (the employer) as a result of a breach of contractual or legal obligations by a third party (the contractor). A surety bond is a written agreement that transfers risk of a contractor's default to a surety providing protection for the employer. In practice, insolvency of a contractor is the most common reason that breaches occur.
A surety bond may also be referred to as a contract guarantee or performance bond.
What types of bonds are available from Allianz?
Allianz provide many types of surety bonds.These include:
Contract Performance Bonds - Contractors will usually be asked to provide a performance bond for up to 25% of the contract price to protect the employer.
Advance Payment Bonds - In circumstances where advances are being given before work is carried out or material delivered, an advance payment bond protects the party making the advance recover the funds if the work is not completed or materials are not supplied.
Retention Bonds - At practical completion stage half the retention money is usually released. If a retention bond is provided all the retention may be released securely.
Customs Trade Bonds - Required by Customs to guarantee compliance with conditions of concessions. We offer a wide range of these including deferred duty bonds, transit bonds and tax warehouse bonds.
This list is by no means exhaustive and should you have a bond requirement we are prepared to review the documentation and confirm if we can provide the bond you require.
What is a bonding facility?
A bonding facility represents a commitment to provide bonds up to an agreed limit subject to the stated terms and conditions being met. A facility limit is set at an amount agreed between the surety and the contractor, bearing in mind the anticipated bonding requirements for the coming year. Facilities are then reviewed and renewed at an appropriate level on an annual basis following the provision of updated, satisfactory information.
At each review, the terms and conditions are confirmed and detailed in writing. This allows a contractor to tender knowing with certainty that bonds can be provided, the cost of a bond and that evidence can be provided by either a letter of intent or a form of undertaking that bond facilities are in place.
What are the advantages of having a bond from an insurance Company?
When a contractor applies for a bond, the procedure may differ slightly depending on the company approached. Allianz have a team of specialists dealing with bond business. We have been providing bonds in the Irish market for over fifty years. We are familiar with the prevalent conditions of contract, tender undertakings and bond wordings required by contractors to satisfy employers.
In obtaining a bond from an insurance company, neither a contractor's working capital nor borrowing facilities are affected.
Where a bond is obtained from a bank, it is regarded by the bank as part of the contractor's banking facilities and the bank usually insists that it will have to be fully supported with tangible collateral.
In addition, an insurance company will issue bonds that are linked to contract performance. They give the contractor the protection of the contract conditions and non performance has to be clearly shown before payment is made under the bond.
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What is the difference between a bond and an insurance policy?
An insurance policy is traditionally a two party relationship whereas bonds are a three party arrangement. The three parties involved are:
- The Employer (or beneficiary) who has awarded the contract and requires the comfort and protection of a bond.
- The Contractor (or principal) who has agreed to carry out the work and arranges to put a bond in place.
- The Surety (or guarantor) who has agreed to compensate the employer for any losses should the contractor fail to meet their contractual obligations.
In addition, bonds are made available on a recourse basis, with counter indemnities being obtained from the contractor/principal, so that should the surety be required to make a payment to the beneficiary they are entitled to seek recourse from the contractor/principal.
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Can a bond be cancelled?
Generally speaking, once issued a bond CANNOT be cancelled without the agreement of the beneficiary.
Unless the bond is released or expires in accordance with its express terms, only the beneficiary can agree to release the bond.
What information is required in order to process a bond application?
At Allianz, we adopt a holistic approach and rather than dealing with a contractor on a contract-to-contract basis, we prefer to consider the firms overall bonding needs. In this manner we feel we can best service a contractor's requirements.
For a first time applicant a completed facility proposal form provides us with a company profile. This provides background information and contact details of the applicant and its advisors.
In addition, we require information that allows us to assess each applicant on the basis of professional experience, financial stability, technical ability and capacity for contracts.
This will ordinarily include the following:
- Audited accounts for the last 2 years
- A forecast of the current years trading and management accounts, if available
- Details of banking facilities
- A Workload schedule
- Details of contracts completed in the previous 5 years.
- Details of key personnel
These details help to provide a comprehensive profile of the contractor.
Why do you require so much information?
A bonding facility represents an extension of credit and, as such, we must assess an applicant's financial strength. We need to have a full and clear understanding of your business. Therefore, a complete analysis of your financial position is necessary. The financial information allows us to assess whether an applicant's financial performance is satisfactory and provides assurance that the applicant is continuing to trade both profitably and within their capabilities. We are happy to work with the management accounting information in the format that you have available.
How long does an application take to process?
Once a contractor has established a facility with Allianz, a bond application can be processed within days of receipt of all relevant information.
However, for a first time applicant, the process usually takes a little longer as we have to get to know the applicant firm and gather information from the applicant. Our underwriters provide a professional service in a timely manner and we undertake to respond to all applications within 2 days of receipt.
Can you always offer terms after you receive an application?
Experienced professional underwriters review all applications and, subject to applications meeting our underwriting criteria, we can offer terms and conditions.
Some applications, however, may be subject to additional conditions and, unfortunately, in some cases we may be unable to provide a quotation.
What is a Counter Indemnity?
A counter indemnity is a legal agreement which entitles the surety, in the capacity of guarantor, to be reimbursed in the event that they have to pay a claim under a bond issued on behalf of the contractor.
A counter indemnity reinforces our common law and statutory recourse rights against the company for whom we have issued bonds.
What is the cost of a bond?
The rates charged vary and each contractor is assessed on their own merits. The rate applicable will be determined by a number of factors including the financial strength of the contractor, the volume of bond business and our underwriting analysis.
Why should I obtain bonds from Allianz?
With specialist underwriters in Dublin, we are the market leader in the provision of bonds and guarantees in Ireland. Our experienced team are familiar with the needs of contractors, including bond wordings, tender undertaking and special bond requirements. This experience, together with our standing as one of Ireland's largest multi-line general insurance companies and our membership of the Allianz Group, Europe's leading Global insurer, mean that contractor's can be assured that a bond issued by Allianz on their behalf will be acceptable to their clients.
What Protection do Employers obtain by insisting on a Construction Performance Bond?
The goal of everyone involved in a construction project is the completion of the project on time and within budget. However, contractors, even reputable long established ones, can, on occasion, experience difficulties, and, from time to time, default occurs. In such circumstances, all parties want completion of the project with the minimum additional cost and delay.
The value of a performance bond is that following a default there is an amount of up to 25 percent of the original contract sum available to cover the often considerable additional costs of securing completion. In obtaining a bond from Allianz employers can take comfort from our financial strength and rest assured that, in the event of a claim, we can be relied upon to deal with the event both swiftly and professionally and meet our financial obligations.
In addition to covering the direct additional costs sustained by an employer following default, sureties are also available, if a contractor defaults, to assist the employer to obtain a suitable replacement contractor who has the capacity to undertake the completion of a contract and thus help minimise the delay and additional costs in achieving completion.
Are you an authorised insurance company?
Yes. Allianz p.l.c., is an authorised insurance company and is regulated by the Central Bank of Ireland and by the Financial Services Authority for the conduct of UK general insurance business.
What are your opening hours?
In Dublin, core operating hours are between 9am to 5pm from Monday to Friday. Guarantee underwriters can be contacted either in writing or by phone or email.
Any further questions?
If you should have any further queries relating to any of the above or anything regarding bonds not addressed here, please feel free to contact us.
We are happy to help.