This covers many aspects of business life but typically these would be:-
Credit Risks - enabling Customers to trade effectively with their Suppliers; and the Suppliers knowing that they have protection against the Customer not paying. This can usually be handled in one of two ways; the Supplier insures for his ‘whole account’ or for ‘specific contracts’ on a one off basis. Sometimes this is seen as a cheaper alternative to Invoice Discounting.
Bonds - can be purchased for differing scenarios – from Performance Bonds (common in the Construction Industry) to Bonds for HM Revenue and Customs purposes including Duty/VAT Deferment Bonds. Tenant Default, Advance Payment Bonds, Retention Bonds, Road & Sewer Bonds, Infrastructure Bonds and Deferred Consideration Bonds are also available.
Mortgage Indemnity Guarantees – where the Lender is insured (the Premium for which is usually paid by the Mortgagor) to enable the Borrower or Mortgagor to obtain higher levels of funding the loan of a value of say 95% of the Market Value of the property as opposed to the normal limits of 70%.
Insurance Backed Guarantees – where an Insurer effectively provides cover in the event of financial insolvency of the company providing the service and they are unable to honour their contract. Due to such circumstances the Insurer will step in to make sure that necessary action is taken on the basis of the original contract.
We have recently placed a unique Insurance Backed Guarantee with Lloyd’s of London for one of the largest treatment and a remediation companies specialising in the Treatment of Japanese Knotweed – which is one of the biggest threats to the Developer/Construction Market at the moment.
Lenders and Finance Houses are reluctant to get involved with any property that has any sign or history of Japanese Knotweed. Having the backing of a Lloyd’s IBG gives them peace of mind that in the event of the Treatment Company going into receivership/liquidation, the treatment and associated costs of re-treatment of any site is covered by the Insurers.
This is why it is critical to make sure that the Insurer issuing the Guarantee has the correct financial standing and is properly rated with AM Best or Standard and Poor’s, as the Guarantee is only as good as the financial security of the Insurer behind it.
Other examples where Insurance Backed Guarantees come into play would be where Builders give Guarantees on their work – such as trades working on Window Replacement or Flat Roofers. Although they seem good people or companies to deal with and are competent their financial credibility is questionable, so if anything happens in the future the customer knows that the work will get done.