During these times of such economic uncertainty, we all need to find solutions to problems before they occur. When suppliers and contractors enter into a contract, there will often be an obligation for them to provide the Employer with a form of security, usually a guarantee or bond, which can be sought from either banks or insurance companies.
With it currently being so important to demonstrate access to working capital and financial strength, there are several important reasons why it makes more sense to procure an Insurance Backed Guarantee or “Surety Bond” to fulfil this contractual obligation to the Employer.
Key advantages of the Surety Bond approach include the following:
Ensuring Cash Stays in Your Business
A bank will usually require some form of collateral when issuing guarantees, typically in the form of cash or by reducing banking facilities or overdrafts. At a time where ’cash is king’ and so crucial to the success of a company, this is not an attractive proposal. In the case of a Surety Bond, an alternative form of security is taken via a Deed of Counter Indemnity. The Indemnity will provide the Surety Guarantor with recourse to the Bonded Principal and an ability to attempt to recover losses if the bond is called in or the Bonded Principal becomes insolvent. This allows the company the opportunity to reinject the cash into the business.
Greater Protection of the Underlying Contract
Bank Guarantees are always ‘On-Demand’ obligations which provide little to no protection to the Bonded Principal of the underlying contract. When selecting the Insurance Backed Surety Bond alternative, your options widen out. Sureties can still issue On-Demand Bonds to certain companies that can support such an obligation, although they primarily issue Conditional Bonds. A Conditional Bond provides protection of the underlying contract conditions, as any losses are required to be established and ascertained prior to the Surety paying out on any damages.
Prompt and efficient claims settlements
Adjudication and Financing style wordings are also available which will enable the Employer to receive a prompt settlement at the time of a claim. These wordings include provisions that enable the Surety to dispute a settlement once the contract has been completed and the true losses have been established and ascertained. This provision also works the other way in favour of the Employer if their original bond call is not sufficient to cover their losses, up to the maximum bond amount.
At Lockton, we are firm believers of providing a comprehensive service with multiple benefits to our clients. Our dedicated Surety Practice will work with you to optimise the use of surety bonds to improve flexibility and profitability for you and your business.
Lockton have close working relationships with all UK & Ireland Regulated Sureties. This allows us to arrange the right solution with the right partners for you and your company. There are no hidden fees or costs with Lockton Surety Practice, and you will only ever have to pay for a bond when you require it. There are also no facility fees, wording review fees, non-utilisation fees or arrangement fees, which you may incur with banks and other UK & Ireland surety brokers.
For further information, please download our brochure here (opens a new window) and contact Ben Milan if you are interested in procuring Surety Bonds or have any questions.
