An Insurance Bond is a three-party instrument whereby one party (Insurer or Bank) guarantees a second party (the principal) financial protection against a third-party (the contractor or Insurer’s client) failing to perform in accordance to the terms and conditions of a contract.
In the event that the client fails to meet the obligation or complete the contract in time, the Insurer has to pay the principal for losses incurred up to the amount specified in the Bond or undertake to complete the project.
Why are Bonds used?
- With the Bond, the Principal is assured that he will be compensated in the event of any non-performance
- It helps reduce the chances of incomplete, bankruptcy or poor workmanship causing the project to be abandoned
- Bonds are subject to stringent underwriting, thus there is a good chance the contractor/client will complete the project
- From the viewpoint of the contractor/client, it helps them with their cash flow as they only need to pay a small premium for the Bond as compared to the large Security deposit
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