Insurance guarantees
Insurance guarantees are perfect instruments for all the companies participating in public competitions and tenders, the purpose of which is to select the contractors for the Principals called the guarantee Beneficiaries. Due to the guarantee, obtained from the Insurer and accepted by the Beneficiary, the company does not need to freeze its own financial assets for the purpose of providing the required security in the scope specified in the terms of reference. In the case of using insurance guarantees, the Contractor also does not bear the risk associated with the possibility to lose the amounts retained by the Principal towards security, in the case of its bankruptcy.
The request, included in the terms of reference, for the Contractor to provide the suitable security for the risk assumed, results directly from the uncertainty of business transactions. In some cases the security obligation results directly from provisions of the law, and in others – solely from the Principal’s decision. The Principal may choose among many forms of security against the risk that the obligation will not be performed or will be performed improperly. From its point of view, the security should be certain and floating. Naturally, these conditions are met by monetary securities in the form of cash deposits or blockades of funds on bank accounts. However, from the point of view of a Contractor, a much better solution would be to apply the insurance guarantee which introduces the third entity, i.e. the Guarantor (the insurance company), to the relationship between the Principal and the Contractor.
By granting the guarantee, the Guarantor undertakes to pay the Beneficiary the specified amount of money if the debtor (applying for guarantee) fails to meet the obligations covered by the guarantee. There exist several types of insurance guarantees, depending on the type of secured risk, e.g. the guarantee of payment of the tender bond, guarantee of repayment of advance payment, guarantee performance guarantee, guarantee of removal of defects and faults.