Insurance Bonds

Author: Anna Kozik – Insurance Broker

INSURANCE BONDS

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Close analysis of the market indicates that after the Polish accession to the European Union the need for bank and insurance bonds as a form of cover for all types of contractual obligations causing financial consequences related to the business activity significantly increased. Bonds as an financial policy instrument of companies have eliminated other – more expensive, more risky and onerous forms of cover, so that reduced transactioncosts. Companies are more willing to reach for insurance bonds, since the bank bonds block the credit limit.

BOND – is a civil law contract – concluded between the Guarantor and the Beneficiary, whereby the Guarantor agrees to take the Beneficiary’s risk associated with the implementation or failure of the project hereunder. It covers the enterprise against blocking the financial resources especially in long-term performance bonds and retention bonds.

On the Polish market companies announcing tenders base mostly on the Public Procurement Law, which governs inter alia the issue of cover.

When submitting the offer to the announced tender it is required to deposit a bid security. The Public Procurement Act allows to various forms of security deposit and among them is a bid bond. This bond is submitted to the Ordering Party for an amount equal to the value of the security deposit as set in the tender conditions. The most common period the bid is issued is 30, 60 or 90 days for an amount corresponding up to 3% value of the contract. The purpose of a bid bond is to protect the interests of the Tendering Party in case the bidder turned out to be unreliable; dishonesty of the bidder can manifest itself in particular that when selecting his bid he refuses to sign an agreement with the ordering party on the terms proposed or refuses to provide a performance bond in accordance with the requirements of the ordering party. Public Procurement Act sets 2 additional situations in which there is a seizure of the security deposit. After winning the tender, in accordance with the Act, the ordering party may require further security, this time the performance cover. The law also in this case allows an insurance bond as one of the possible to bring forms of cover. The Performance Bond is generally issued for an amount corresponding to 2-10% value of the contract for the full period of a particular contract, which is until faultless final protocol is signed + 30 days for release of the cover. The essence of this bond is to cover the proper performance of contractual obligations. Often bond can simultaneously cover the obligations arising from the quality guarantee and liability for defects (surety). We then have in a single bond document the combination of two types of bonds, i.e. Performance bond and retention bond. Such combined bond is issued for the contract period and for a period of declared in the contract quality guarantee and/or surety. If the client does not ask for the performance cover, he may at the end of the contract and after signing the final faultless protocol ask for the cover for the period of granted quality guarantee and/or surety. The Public Procurement Act, as in the cases described above, also allows insurance bond as a possible form of cover for that period. The retention bond is issued mostly at 1.5 – 3% value of the Contract, for the entire period of declared quality guarantee and/or surety. Public Procurement Law Act says about covering the period of warranty.

If the ordering party gives the contractor an advance payments for the execution of the Contract it also gives a condition to present a cover for advance payment refund. Advance Payment Bond is issued for the full amount of granted advances and the Contract Period or for a period of settling the whole advance payment.

In Poland among the above contract bonds the most issued are bid bonds, performance bonds and retention bonds. The last above described type of bond which is The Advance Payment Bond is issued less frequent, which is due to the fact that not every contract signed in Poland provides for the advance payments.

Other types of bonds available in Poland are: custom bonds, rent bonds, environmental bonds (as a cover for claims of the Treasury of the negative effects that may arise in the environment in relation to waste management in accordance with amendments to the Law of 22 January 2010 amending the Law of wastes and certain other laws), Road Bonds (Via-Toll), EU grant bond.

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Methodology of service in the field of insurance bonds:

  1. Gathering information about the demand for insurance bonds.
  2. Asking the market for a bond limit.
  3. Presenting, comparing and recommending preliminary results of offers.
  4. Negotiations of terms with two, three insurers who made ​​the best offers.
  5. The final analysis of the provision of bonds, together with the recommendation.
  6. Preparation of documents for the conclusion of agreements with a bond limit.
  7. Participation in signing limit agreements and placing cover to general agreements.
  8. Development of request instruction for different types of bonds, together with an enumerated list of documents.
  9. The current service for applying for bonds
  10. Giving opinions on Bonds’ Content.
  11. Direct discussions with the Beneficiaries of bonds in order to set the bond content.
  12. Ongoing monitoring of Bond limit used.
  13. Ongoing monitoring of the insurance market and informing on new types of bonds.
  14. Providing trainings.
  15. Legal assistance in case of any doubts related to the subject of insurance bonds.
  16. Reporting.
  17. Substantive help in obtaining payments from bonds or in case of payment refusal.
  18. Monitoring of National Chamber of Appeals’ verdicts concerning bonds in accordance with the Public Procurement Law.