Who is protected, and who pays in the end
| Point | Insurance | Performance guarantee |
|---|---|---|
| Who is protected | The insured, for the loss insured | The employer (the beneficiary) |
| What triggers payment | An insured event under the policy terms | A demand that meets the guarantee wording, which may be on demand or conditional |
| Who pays in the end | The insurer, within limits and subject to the policy terms and excess | The contractor, normally, through reimbursement of the provider |
| Relationship to the contractor | The contractor is the policyholder | The contractor gives a counter-indemnity to the provider |
| Security required | Usually none beyond premium and conditions | Providers may require security, sureties or collateral |
| Purpose in a contract | Manages accidental loss and liability risks | Gives the employer security against the contractor’s failure to perform |
| Typical example | Contractors All Risk, public liability, plant | Bid bond, performance guarantee, advance payment guarantee, retention guarantee |
Repayment obligations
When a guarantee is called, the provider pays the employer according to the wording. It then looks to the contractor under the counter-indemnity the contractor signed. In practice that means that a call on the guarantee is a call on the contractor’s balance sheet, even though the provider paid first.
Whether the employer was entitled to make the demand is a separate question, to be dealt with under the contract and the guarantee wording. In some forms of guarantee, the provider must pay on a compliant demand even if the contractor disputes it, and the argument follows. That is why the wording matters so much.
On demand and conditional guarantees
- On-demand style
- The provider pays on a written demand that meets the wording, often without the employer having to prove default. This gives the employer fast access to security, and the contractor carries the risk of an improper demand.
- Conditional style
- Payment depends on stated conditions being met, such as proof of default or an adjudication or court outcome. This can offer the contractor more protection but may be less acceptable to some employers.
The employer’s contract documents often prescribe the wording. Departing from it may lead to the guarantee being rejected.
Why a contract may require both
Contracts often require insurance and security together because they address different risks. Insurance deals with accidental loss to the works and liability to third parties. Guarantees deal with the employer’s credit exposure to the contractor. Holding one does not replace the other. See insurance after winning a tender for how to handle both.
- A Contractors All Risk policy does not secure the contractor’s performance of the contract.
- A performance guarantee does not compensate the contractor for damage to the works.
- Neither is a substitute for the contractor’s own financial planning.
Capacity, cost and planning
Providers decide how much security they will issue for a given contractor, and what they charge. Using capacity on one contract may limit what is available for the next. It is sensible to plan guarantees as part of the tendering decision, along with insurance and cash flow. See how to get construction tenders.
Common questions
Can insurance cover a guarantee that is called?
Not as a general rule. A guarantee is a credit arrangement between you and the provider. If it is called, you normally have to reimburse the provider, and a standard insurance policy does not pay that.
Is a performance bond the same as a performance guarantee?
People use the terms interchangeably. What matters is the actual wording: who the provider is, what triggers payment, the amount and the expiry.
What happens to the guarantee when the contract ends?
It ends according to its wording, which is often tied to practical completion or the end of the defects period. The original should be returned to the provider once it is no longer needed.
Why might a provider ask for director suretyships?
Because the provider’s recourse is against the contractor, and a small business may not hold enough assets of its own. Whether this applies is a decision for the provider.
Contract asks for both insurance and security?
Send us the clauses. We will help you see what is being asked for and what we can assist with.
Get a QuoteAn enquiry does not put cover in place. Cover is subject to underwriting and policy terms.
Related reading
- Performance guaranteesHow performance guarantees work, what to check in the wording, and what the application and assessment involve.
- Construction guaranteesOverview of bid, performance, advance payment and retention guarantees, and how to start a qualification enquiry.
- Performance guarantee application documentsThe kinds of information a guarantee provider may ask for when assessing a performance guarantee application. A general guide, not a universal issuer checklist.
- Contractors All RiskCover for the works under construction, such as roadworks, drainage, pipelines and structures, subject to policy terms.