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Historically many companies have approached banks when requiring a bond. A bond is not a policy of insurance but is in effect a form of financial guarantee. It is a guarantee by one party (the surety or guarantor) to another party (the body requesting the bond) that a third party (the company requiring the bond) will meet its contractual obligations. Increasingly insurance companies are providing bonds, with two distinct advantages over the banks:
- Charges on company assets are not generally requested
- No reduction upon the company's borrowing facility will be imposed.
Before acting as a surety or a guarantor in respect of a bond, an insurance company will usually require the following information:
- Three years financial audited account for the applicant company
- Three years consolidated audited account for the ultimate holding / parent company in addition to the above if the company is owned by another company
- Full details of the circumstances in which the bond is required, including a copy of the bond wording and the bond amount
A fee is charged for providing the bond and counter indemnities are generally required from the applicant company and / or its ultimate holding / parent company. In certain circumstances, counter indemnities may also be required from shareholding directors in their personal capacity. A counter indemnity is in many respects a written formalization of an existing common law right. If a company for whom a guarantee is provided fails in its obligation to perform and this gives rise to a call on the bond, surety or a guarantor can claim reimbursement from the company. |
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