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LigaAsuransi > Blog > Financial Risk > Bank Garansi > 8 Things You Should Know About Surety Bonds
Bank GaransiFinancial Liability

8 Things You Should Know About Surety Bonds

Hanifah Ayu
By Hanifah Ayu
Published Monday September 26th, 2022
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0 Min Read
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Liga Asuransi – Have you ever heard of a surety bond? Maybe most people already know or have even used this surety bond guarantee for their business interests. 

On this occasion, we will invite you to have a discussion to understand more about surety bonds. If this article was of interest to you, please share this article with your friends so they can understand it as much as you do.

A surety bond is defined as a three-party agreement that legally joins the principal (contractor), the obligee (project owner) who requires collateral and the obligor (surety, generally insurance company) who sells the guarantee.

Surety bonds can be used to ensure that government contracts are completed, cover losses arising from court cases, or protect the company from employee dishonesty.

The guarantor will guarantee the principal to act in accordance with certain laws. If the principal fails to carry out his responsibilities, the surety bond guarantee will bear the resulting losses.

A surety bond is a promise issued by a surety company to pay the first party if the second party fails to fulfill its obligations. There are three parties involved, namely:

  • Principal: People who have to do good on an obligation.
  • Obligee: A person who needs assurance that the principal will perform his or her duties.
  • Guarantee: The surety bond issuer guarantees that the principal will fulfill its obligations.

 

  1. How do surety bonds work?

The way it works is practical and simple, where the surety bond document requires the surety to pay a predetermined amount of money to the obligee if the contractor fails to fulfill his obligations under the contract.

Obligees are government agencies, but private commercial and professional parties can also use surety bonds. Surety bonds help principals, usually contractors, compete for contracts by assuring customers that they will receive the promised product or service.

To get a surety bond, the principal pays a premium to surety, the insurance company. 

Surety bonds require the principal to sign an indemnity agreement that guarantees company and personal assets to replace the collateral in the event of a claim. 

If the assets are insufficient or cannot be collected, the guarantee pays its own money to meet the claim.

  1. Who is the Principal Surety Bond?

Surety Bond is a 3-party contract between the principal, the obligee and the surety. Principal is the party requested by the obligee to issue a surety bond. 

There is one reason why the obligee requires a surety bond is to transfer the principal’s risk from the obligee to the surety. If the principal has done what they say, then the surety bond is null and void, otherwise the obligee has financial protection from the surety bond.

Principal surety bonds can be individuals or companies. Principal is the person who is responsible for carrying out the obligations according to the criteria.

In order to get a surety bond, the principal is required to apply and be approved by the surety carrier. This approval process is called underwriting. The purpose of underwriting is to determine whether the guarantee is a good risk for the guarantee holder. 

The main purpose of underwriting insurance companies is to determine whether the principal can compensate or replace the guarantee issuer if the principal does not carry out and the guarantee issuer must pay a claim to the obligee.

The principal will always be required to compensate for the guaranteed bond. Because the guarantee guarantees the principal’s performance, compensation is basically the principal guaranteeing his certainty that he will actually do what they say or do. 

  1. Surety Bond Contracts Surety Bond

guarantees are generally used to guarantee the performance of the contractor (who in this case is the principal) for construction contracts. If the contractor fails, the guarantee company must ensure another contractor to complete the project or reimburse the project owner for financial losses. 

  1. How long does it take for the surety bond issuance process?

If the information required by the underwriter (guarantor) is complete, then the time needed to process the surety bond issuance is only 3 days.

However, because this is an official guarantee related to money, the surety requires sufficient information before providing a guarantee.

For this reason, the underwriting party (guarantor) requires some information related to the requested guarantee. The key is speed in collecting the necessary data and documents.

All of the data should already be in your company because the requested data is almost the same as the data requested for the tender requirements. There may be some other document information that is specifically related to the warranty.

The following are some of the documents and requirements needed for the issuance of a Surety Bond:

  1. Making a Letter
    • Submission of a Surety Bond Issuance Application from a Guaranteed Candidate (Principal) to the Guarantee Company
    • The Application Submission Letter must include:
      • Type of Surety Bond Guarantee to be issued
      • Name and Address of the Guaranteed (Principal)
      • TIN Number Guaranteed (Principal)
      • Name and Address of Guarantee Beneficiary (Obligee)
      • Name of Work Package
      • Contract
      • Value Guarantee Value
      • Validity/Period Bank Guarantee
      • Special Document (Underlying)
      • Name and Position of the Guaranteed Person in Charge (Principal)
      • ID Number & TIN of Responsible Person Guaranteed (Principal)
  1. Complete the Document Requirements for analysis purposes:
    • Mandatory Documents (especially for Guaranteed Candidates/new Principals)
      • Copy of Deed of Company Establishment & Letter of Approval from Kemenkumham
      • Copy of Deed of Company Change & Letter of Endorsement from Kemenkumham
      • Copy of SIUP/SIJUK, TDP, SKT, PKP, NPWP, SKDP/U & Membership of
      • Copy KTP & NPWP Company Management
      • Financial Statements for the last 2 years
      • Listed Company Work Experience
      • Listed Company Experts
      • Listed List of Work Equipment
      • Signing Agreement Letter of Ability to Pay Compensation (SPKMGR)
    • Special Documents according to Type of Guarantee:
      • Bid Bond (Bid Bond)

Copy of Procurement Document or Auction or Requirements Work Plan (RKS) / Auction Invitation / Auction Announcement / Minutes of Job Description.

      • Performance Bond.

Copy of Appointment Letter for Goods or Service Provider (SPPBJ)/Work Order (SPK)/Start Work Order (SPMK)/Agreement (Contract)/Purchase Order (PO)/Letter of Intent (LOI) /Work Order (WO)

      • Advance Payment Bond (Advanced Payment Bond)

Copy of Contract (Letter of Agreement) / Work Order (SPK) / Work Start Order (SPMK) / Purchase Order (PO) / Letter of Intent (LOI) / Work Order (WO)

      • Maintenance Bond (Maintenance Bond)

Copy of Contract (Letter of Agreement) and Minutes of Handover (BAST) First Work/Work Progress 100%

  1. Documents – Additional Documents:

If Submission for Goods/Services Procurement Work, it must be attached:

    • Letter Supplier/Vendor Support and/or Support Letter/Manufacturer Certificate of
    • Purchase Order if the goods have already been purchased.
    • If the Submission for Warranty Extension, must be attached
    • Copy of Addendum/Amendment Contract
    • of Work Progress that has been implemented
    • Time Schedule for Completion of Work
    • S Correspondence regarding the reason for the extension
  1. Paying the Service Charge

Payment is made after the Surety Bond is approved for issuance

  1. . Surety Bond is issued (Finish)

 

  1. When do you need a surety bond?

In general, surety bonds are required for contractors who wish to work on high-cost government contracts.

Even when it is not mandatory, surety bonds make sense when the contract requires performance, because they help compensate the obligee when the principal does not fulfill or defaults on their contractual obligations. 

In the construction industry, some lenders may require that projects be tied up before they extend financing.

  1. How do I get a surety bond?

Surety bonds are generally underwritten and issued by insurance companies. A licensed insurance broker is the right partner to help you find the best surety bond that fits your contract. Avoid using the services of a broker who does not have permission from the OJK.

The construction of infrastructure such as ports, bridges, hydroelectric power plants, networks, networks, pipelines, and tunnels requires substantial completion and performance risks. 

Because infrastructure projects are exposed to this risk, engineering, procurement and construction (EPC) contractors are often asked to provide guarantees of completion. The guarantee can be in the form of surety bonds, a special line of business in the insurance industry.

Surety bonds are an efficient tool for selecting contractors and increase the likelihood of project completion in the event of default. They are cost-effective and do not rely on the limited borrowing capacity of commercial banks. In the insurance industry, underwriting is the process of evaluating, defining, and pricing risk. 

Underwriting a surety bond usually involves an assessment of the three C’s, namely capital (financial strength), capacity (ability to perform contracts), and character (integrity, reliability, and commitment to fulfill obligations). However, current practice in underwriting surety bonds varies across companies and markets.

  1. How to avoid disappointment for Surety Bond transactions?

The Surety Bond function is very important in a construction work transaction where if the Tender Guarantee provided is not in accordance with the requested it will result in the contract being void.

So you need to be careful from the beginning of the Surety Bond issuance process. When you need a Surety Bond, please contact an insurance brokerage company that is officially registered with the Financial Services Authority (OJK). 

Frankly, lately many companies claim to be brokers that offer Surety Bonds and guarantee insurance, but the company is not registered with the OJK.

To prove it, please check the name of the company on the website of the Association of Indonesian Insurance Brokers and Reinsurance Brokers (APPARINDO) or on the website of the Financial Services Authority (OJK). If the company name does not exist, then they are not an official insurance brokerage company.

  1. What are the advantages of using the services of an official insurance broker?

There are so many advantages that you get by using the services of an insurance broker, including the following:

You get a complete and responsible insurance consultation, because every insurance brokerage company is required to have an APAI/CIIB certified insurance expert recognized by OJK and BNSP

Have the freedom to choose a company with the best insurance because the broker is not tied to just one insurance company.

You get protection for errors and omissions that may be made by the broker, because the insurance broker protects itself with a Professional Liability insurance policy, according to the provisions of the OJK.

In accordance with the provisions of OJK, insurance brokerage companies are required to have assets of at least Rp. 3 billion, to ensure that you get maximum service.

Insurance brokers are able to get the most competitive premium fees because they have a better bargaining position with insurance companies.

Source : https://lngrisk.co.id/glosari/principles-surety-bond/ 

https://lngrisk.co.id/glosari/berapa-lama-time-proses-penerbitan-surey-bond-dan-garansi/ 

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L&G HOTLINE 24 HOURS: 0811-8507-773 (CALL – WHATSAPP – SMS)

website: lngrisk.co.id

E-mail: customer.support@lngrisk.co.id

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TAGGED:bank garansisurety bond

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