It is the best alternative among existing guarantees to present to public administrations and large private companies when applying to take part in certain projects. Surety insurance allows an SME, a self-employed professional, or any company to have additional financial backing, broader than what they could provide on their own.
The Insurance Contract Law governs this type of product to ensure that the individual or legal entity with whom an agreement is signed complies with everything agreed upon. In case of failure to meet legal or contractual obligations, the insurer covers the payment or financially compensates the beneficiary.
For example, if a construction company is hired to build a new bridge but, for any reason, does not complete it on time or under the agreed conditions, the insurance company compensates the affected party that is, the contracting entity.
Main Applications of Surety Insurance
In contracts signed with public administrations and official agencies, guarantees are mandatory. Surety insurance is one of the options that offers the greatest advantages in this area.
One of its main uses is to cover losses, damages, penalties or costs resulting from a breach of contract in a public tender.
More specifically, there are two basic types of coverage:
Counter-guarantee: guarantees damages or losses that may arise from contractual breaches.
Substitution of precautionary measures: allows the release of assets affected by such measures, including asset freezes, account holds, credit seizures, restrictions on disposal, and more.
Types of Guarantees These Policies Can Cover
⏺️ Bid Bond: Essential for accessing tenders or bids with the public administration. This type of insurance confirms the seriousness of the proposal. The value of this bond usually ranges from 2% to 10% of the total project cost.
⏺️ Advance Payment Guarantee: Used in high-value contracts, it protects against mismanagement of advance payments (typically up to 30% of the total). It guarantees the money will be used for project execution.
⏺️ Performance Bond: Ensures compliance with the contract terms. This is a performance guarantee covering financial damages caused by the contractor’s failure to fulfill the contract. Typically, it equals 5% of the contract’s value..
⏺️ Customs Transit Bond: Used when goods enter Spain and then exit again, ensuring that tax obligations are met if the goods do not leave the country.
⏺️ Warranty Bond: Ensures the quality of the work carried out, covering any defects due to poor execution.
⏺️ Judicial Bond: When a financial guarantee must be presented in court. This is broad in scope and includes any amount to be secured during a legal proceeding, ensuring payment by a third party if the defendant lacks funds.
⏺️ Tax Deferral Guarantee: Allows the deferral of taxes owed to the tax authorities, such as VAT, Corporate Tax, Income Tax, etc.
Advantages of Surety Insurance
Surety insurance offers many advantages over bank guarantees. For example, it is faster and more agile to issue, does not require notary involvement, does not immobilize funds, and is not recorded as banking risk in the Bank Report Risk.
Without a doubt, it is a more flexible solution, tailored to the specific needs of each company.
Summary of Key Advantages
▶️ Not included in Bank Report Risk, improving banking solvency and increasing credit capacity.
▶️ No immobilization of financial resources.
▶️ In most cases, no need to provide collateral and, when required, the terms are lighter than those of banks.
▶️ No notary costs.
▶️ No need to freeze cash.
▶️ Guarantee is provided by an insurance company, not a bank.
▶️ More flexible conditions.
▶️ The insured amount does not appear as a liability but is recorded as a deductible expense.
▶️ Facilitates commercial activity development.
How to Request Surety Insurance
As we’ve explained, this type of insurance offers businesses and freelancers a way to protect their business if unforeseen events arise that could threaten continuity. That’s why it’s essential to understand how to obtain surety insurance.
In addition, it conveys the credibility necessary to work with public entities, guaranteeing clients that they will be compensated if the agreed terms are not fulfilled.
In short, it provides peace of mind against commercial risk and is essential for companies seeking to operate reliably, transparently, and stand out in their sector. You can contact Sammy Free to request more information and find out how much this type of insurance would cost based on your company’s characteristics.
