Surety Insurance: what it is, types and how to hire it
A surety bond is an agreement between three (3) parties: the guarantor (Insurer), the beneficiary (counterparty), and the policyholder (client). The Insurer guarantees the Beneficiary that the policyholder will comply with the contract terms.
Sometimes companies need to issue a financial guarantee before a third party and Surety Insurance is the most economical and the fastest way to do it.
The beneficiary can be either a Public Body or a private entity. Usually, companies, SMEs, or freelancers – even individuals – may be forced to obtain a bank guarantee which may reduce their credit capacity. Commonly, they will also have to secure a large amount of cash collateral while risking their financial stability. As an alternative, in these cases, it is possible to opt for Surety Insurance that offers the opportunity of complying with this requirement without the need of pledging any amount of money.
Bonds are also mandatory for obtaining a license to perform some business, such as: security guards, realtors, and contracts with government agencies.
What is Surety Insurance?
As explained before, a surety bond is an agreement between three (3) parties: the guarantor (Insurer), the beneficiary (counterparty), and the policyholder (client). The Insurer guarantees to the Beneficiary that the policyholder will comply with the contract terms.
The process of obtaining a surety insurance in Spain is fast and provides financial benefits to the policyholder. The main difference between a traditional bank guarantee and a surety bond is that bonds issued by insurance companies are not registered in Spanish CIRBE (Central de Informacion de Riesgos del Banco de España).
For these and other reasons, choosing a bond through Surety Insurance is the best option for companies’ businesses
Surety insurance has very wide margins of action and it can be used whenever there is a legal relationship between two parties. This insurance also helps to strengthen that relationship.
Here you can see the main advantages of surety insurance versus bank guarantee. Click on the link to watch our video
What does surety insurance cover?
It covers the eventual failure of the policyholder when fulfilling the contract obligations of the contract between the policyholder and the beneficiary. It is a warranty for a breach of contract.
How does surety insurance works?
The definition of Surety Insurance is simple so as its operation. The surety bond is nothing more than a guarantee delivered by an insurance company. It is equal to a bank guarantee but it is issued by an Insurance Company.
As stated in Royal Legislative Decree 2/2000 of June 16, which approves the revised text of Law 13/1995, of May 18, on Public Administration Contracts, the coverage offered by a surety bond has the same legal validity as a bank guarantee.
If you want to learn more about this topic you can read this article: the differences between credit insurance and surety insurance.
Types of Surety bonds
There are two different types of surety bonds: one for projects between companies and public administrations or official bodies and the second one for private transactions between companies.
Guarantees or bonds are mandatory in activities related with public administration and official bodies and surety insurance is an alternative with many advantages.
For example, one of the most common types are bonds for access points and connection to the electricity grid. Companies can submit the mandatory bonds through surety insurance for renewable energy installations.
These are the most common modalities of surety insurance:
Renewable energies bond
This is a surety guarantee for renewables energy projects required by the Government. They´re also called grid bonds and the main purpose is to ensure that the developer does not desist and actively collaborates with the Public Administration during the construction of the photovoltaic plant or solar farm until its completion.
Bonds between private parties
In any commercial relationship where there are contracts between private companies, the bond between private parties gives reliability to the commercial agreement. Likewise, issuing a surety bond guarantees compensation for damages caused by the non-termination of the contract.
Here you have more information on when to issue a surety insurance between private companies.
Customs operators perform several transit operations for goods or merchandise that require a set of guarantees. For example, when the importer lifts goods. In this article you can learn more about how to improve import guarantees.
Construction bonds are very common as a Surety product. Through it you can submit all kinds of guarantees for public works contracts, such as performance, deferment of Spanish tax ICIO (Impuesto sobre Construcciones, Instalaciones y Obras) or swap contracts.
This bond is aimed at construction developers. The developers handle the house buyer’s account deposits, therefore, they have the obligation to guarantee the amounts collected upfront from the house buyers as pointed out by the LOE (Ley Orgánica de Educación).
This way, it covers the eventual return of the amounts collected upfront if the job is not completed. Sometimes the job is delayed and not finished before the deadline agreed on the contract and some buyers ask for their money to be returned.
Their purpose is to make sure that the amounts required by judicial bodies are paid in order to allow a late payment or the sanction´s appeal
Thus, the special interest of surety insurance is to appeal judgments for tax penalties, sanctions for competition or appeals before the public administration that go beyond the administrative route.
Surety insurance bonds do not appear in CIRBE, helping our financial suppliers protecting sensitive information that may damage the company image.
Legal guarantees are required for worker´s dismissals appeal, disputes in the payment of taxes (once the administrative route has passed), convictions with suppliers or customers, and even with the administration´s sanctions. A good way to also cover the defense costs and finances constitution is to have contracted a D&O Insurance in case the defendant is an individual.
when may you need a legal bond?
- In sentences for dismissals.
- Against suppliers or customers.
- Tax penalties, etc.
Their main advantage is that they avoid the need of pledging funds in favor of the court.
With surety insurance we can face the mandatory guarantees for Public Administration contracts or other Public Sector contracts that are not considered regular performance bonds).
Law 9/2017 of November 8 (Public Sector Contracts) regulates this type of guarantees for the public sector and with surety insurance the company may operate in this branch certifying the availability of a guarantee to comply with the administrative concession.
Here is an extensive overview of guarantees for public tenders.
Security Guard Companies bond
As stated by the General Directorate of the Police (Ministry of Home Affairs) and according to their functions private security companies are compelled to guarantee a certain amount for possible sanctions coming from a regulatory body.
Ensuring this capital is an important barrier when incorporating a private security company, without this guarantee it will not be possible to continue with the activity. Once again, surety insurance is the main ally for companies in this sector.
With this insurance, the financial capacity of the company is not compromised and has lower notary expenses. Here you have more information about the guarantees for private security companies.
Here you have a complete Guide on Guarantees for Companies.
Take out surety insurance
To obtain surety insurance is required to conduct a previous study to verify the viability of the risk. We will request the official accounts or tax declaration documents. Remember that surety insurance is an available option for companies in all sectors.
Here you can check all the requirements for surety insurance.
The way to obtain a surety bond is different from a bank guarantee. Bank guarantees require to formalize the agreement through notary. On the other hand, in surety insurance, you simply sign a contract, and there is no need to formalize the agreement on the notary unless there are additional guarantees.
How much does surety insurance cost?
Defining how much surety insurance costs is not easy, not all guarantees cost are the same. There are differences in pricing between some companies and others. Therefore, we will be interested in being endorsed by a company with the highest solvency possible, insurers are a good example of this type of company. In fact, they get to have better ratings than banks in some cases.
How many surety insurance can you hire?
There are no limits. You can take out as much surety insurance as you need, regardless of the legal form of the company. Having a bond facility open with an insurer allows the company to issue surety certificates whenever you need it for different amounts.
Surety Insurance Experts
Surety & Bonds is the specific and expert surety division of Viafina Insurance Brokerage, where we work with the best surety insurance companies in the market.
We can study your information without any obligation, contact us here to help you during the exercise of your activity and see if you need surety insurance.