At a grant application, a tender or a larger client contract, it often comes up that the company has to provide security – a bid bond, a performance bond or a warranty (maintenance) bond. The first thought is usually a bank guarantee, yet there's a less well-known alternative that's often more convenient for SMEs: surety insurance, also known as guarantee insurance.
- Surety insurance serves a purpose related to a bank guarantee: it demonstrates to the client or the contracting authority that, if the company fails to perform, a third party – here, the insurer – will step in up to the amount of security set out in the contract.
- The main difference from a bank guarantee: it typically doesn't tie up the company's bank credit line, and doesn't require collateral or a deposit of the same size – which can be a particularly attractive point for a growing SME.
- Not every tender treats the two as equivalent – in public procurement, under the Hungarian Public Procurement Act (Kbt., Sections 54(2) and 134(6)), the tenderer chooses from the forms listed in the Act, which include a bond containing an insurer's suretyship undertaking; outside that, the tender or contract documentation determines which form of security is acceptable.
What is it used for?
Surety insurance typically comes up wherever a tender requires some form of financial security: a bid bond to demonstrate the seriousness of the tender process, a performance bond to cover performance of the contract, or a warranty (maintenance) bond for the guarantee period after handover. In the tender documentation, these points often appear in the same place as the insurance requirements – covered more broadly in the insurance requirements in grants and tenders article.
How is it different from a bank guarantee?
A bank guarantee draws on the company's bank credit line, and the bank typically requires collateral or a deposit of a similar size behind it – which can narrow the room for manoeuvre, especially for a start-up or a company in a growth phase. An insurer providing surety insurance works on different logic: it assesses the company's financial position and risk, similarly to underwriting an insurance risk, and typically doesn't affect the credit line. The two solutions aren't competitors in the sense that "one is better" – it's more a question of which one fits the company's financial structure and the tender's requirements better in a given situation.
What should an SME watch out for?
First, timing: assessing surety insurance isn't an instant banking transaction but an underwriting process that takes time to complete – it's worth starting well ahead of the submission deadline. Second, the tender itself: check the exact wording to see whether the contracting authority accepts security in insurance form, and if so, with which content elements. Third, that this is a separate contractual relationship with the insurer, with its own terms and conditions and – in the event of a claim – its own procedure, which is worth reviewing just as thoroughly as any other insurance contract; the logic of the quote-request data checklist article is a good starting point for this.
How does it fit into the company's portfolio?
Surety insurance is typically not the first insurance in an SME's life: it comes up once the company starts entering tenders or signing larger client contracts that call for security. That's exactly why it's worth factoring in already when shaping your tender strategy – not in the last week – and treating it as part of the cover map, since it's another item worth reviewing at each renewal as the company's book of contracts grows.
A common misunderstanding
Many people think of surety insurance as a "normal" property or liability policy, where the claim payment is borne by the insurer and stays there. The surety arrangement is different: if the insurer pays out to the contracting authority or client, it will typically pursue a recourse claim against the business – because, ultimately, it's the company's own non-performance behind the security. Because of this, surety insurance is more of a credit-line-type arrangement built on the company's financial reliability, rather than risk transfer in the traditional insurance sense – it's worth seeing this clearly before you even apply.
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