PERFORMANCE BOND, SURETY BOND AND GUARANTEE
What is a Performance Bond?
A performance bond is a type of surety bond that protects a foreign buyer against an exporter’s failure to perform as agreed—essentially insurance for the importer.
Performance bonds are often required by buyers to award international contracts, particularly when buyers and sellers do not have established relationships. The agreement protects buyers against economic damages and gives them assurance that they will be compensated when sellers fail to deliver as promised.
Document Verification.
International Surety Bonds vs. Letters of Credit
If you plan to expand your business overseas, or your company is an international company that does business in the U.S., then your trading partners may require guarantees before they will contract to work with you. An international surety bond or letter of credit (LOC) can serve to guarantee that the work you are contracted to do will be accomplished. While LOCs and surety bonds have some similarities, there are some considerations that may make international surety bonds a more attractive alternative to LOCs.
While a LOC can tie up a company’s credit capacity, a surety bond usually does not. Opting for a surety bond may help preserve the company’s valuable access to capital. International surety bonds can also be a cost-effective alternative to LOCs, which include interest charges tied to interest rates in global markets. In a rising rate environment, this cost can be an especially important factor to consider. Plus, an international surety bond can be uniquely tailored to meet the specific needs and regulations of a certain country.
What Is an International Surety Bond?
An international surety bond is a guarantee that a company will fulfill an obligation, typically a contractual or regulatory one, in a country other than where the company is domiciled. While an international surety bond works similarly to a U.S. surety bond, there are important differences related to each country’s specific regulations and market practices relative to surety bonds.
Often, international contracts can include more than one type of surety bond, which makes working with an experienced international surety bond provider with a broad capability to issue multiple types of bonds especially valuable. Travelers has experience providing international commercial and contract surety bonds that meet your needs in 65 countries outside the U.S.
How Do International Surety Bonds Work?
While their titles may differ overseas, there are still three parties involved in an international surety bond. In the U.S., the three parties to a surety bond are the principal, the obligee and the surety. For international bonds, they may be referred to as the guarantee applicant, the guarantor and the guarantee beneficiary, or similar titles. The roles of each vary:
- The guarantee applicant purchases the surety bond to guarantee quality and completion of contracted work.
- The guarantee beneficiary is the project owner who requires the applicant to purchase the bond.
- The guarantor is the surety company that issues the bond and financially guarantees the applicant’s ability to complete the contracted work.
With an international surety bond, if the guarantee applicant does not complete the work as contracted, the guarantee beneficiary can make a claim for payment per the bond and contract, typically up to but not exceeding the bond amount. The guarantee applicant would then be obligated to pay back the claimed amount to the surety.
Many international surety bonds are conditional, unlike LOCs which are unconditional and can be claimed for any reason or for no reason at all. Even if a company believes they have satisfied the guaranteed obligations, there could still be a dispute. In this case, a guarantee beneficiary would have more leverage over the guarantee applicant and could expose the guarantee applicant to unfair claims.
Furthermore, for many companies, it may make more sense to utilize their credit capacity on obligations that cannot be satisfied with a bond rather than to guarantee contractual obligations.
Types of International Surety Bonds
There are several types of international surety bonds that Travelers offers global companies. Often, a company may need more than one kind of bond, depending on its business activities.
- Maintenance bonds: A maintenance bond guarantees that a contractor will remedy workmanship or material defects for a specified period.
- Warranty bonds: Similar to a maintenance bond, a warranty bond guarantees that a contractor will fix defective equipment or material should an issue arise during the time specified in the contract.
- Advance payment bonds: When a project owner advances funds to a contractor before the project is completed, the advance payment bond guarantees the contractor will pay the project owner back for any unamortized funds if the project is not completed.
- Performance bonds: A performance bond protects the project owner in the event the contractor defaults on its obligations for delivery, function or quality under the bonded contract.
- Supply bonds: If a supplier fails to deliver materials on time, up to the required agreed-upon quality standards, or in agreed-upon quantity as outlined in the contract, a supply bond pays the contract owner for the cost of the missing and/or below standard materials.
- Judicial bonds: A judicial or litigation bond ensures a litigant pays the costs related to a legal action.
- Customs bonds: A customs bond guarantees that taxes, duties and fees are paid on all imports.
How to Apply for an International Surety Bond
Different countries have varying requirements for surety bonds. It is important to understand what type of bond your customer or project owner requires and in what amount in order to get a surety bond. You can then contact your independent agent to help you apply for a surety bond. That process will typically include:
- Evaluation and qualification – You will be required to provide financial documents that demonstrate your creditworthiness and that you have the resources to fulfill the terms of the surety bond. You will also be asked to provide details about the project that will be covered by the bond.
- Underwriting – During the underwriting process, Travelers assesses the application. The evaluation typically looks at three factors:
- Character – A strong credit record and other history of upholding obligations
- Capacity – Appropriate skill, experience, equipment and other factors necessary to perform contracts
- Capital – Strong financial position to manage the new project in addition to handling other obligations and potential problems
At ACE, we understand the challenges that complex, interconnected risks present for today’s large and multinational organizations. We’ve been providing globally coordinated, locally flexible insurance solutions for large organizations and their brokers for three decades.
We've taken the next natural step in our evolution and raised the bar in every way with the creation of ACE Global Accounts – a division that focuses our worldwide underwriting, service and claims capabilities exclusively on large organizations with complex risks.
From traditional P&C and A&H risks to emerging threats related to environmental concerns, cyber attacks, terrorism and political violence, ACE Global Accounts works in tandem with your broker to help manage your entire insurance program more efficiently, more transparently, and more cost effectively.
Led by senior ACE executives and staffed with professionals at the top of their fields, ACE Global Accounts brings best-in-class service, dedicated client and claims relationship management, the power of our unique global network, plus our intuitive ACE Worldview® technology, together in one integrated package. And we do so in a way that ensures a straightforward and streamlined experience for you at all points.
Solutions where you are, wherever that may be
We have extensive operations in 54 countries and territories, and a network that spans 200 countries – all performing under exacting measured and published service standards. Combined with our product breadth and financial strength, this means we can help you manage risk anywhere in the world with confidence. In fact, the more complex your exposures, the more valuable our capabilities.
Enhanced service
Client relationship management: Easier for you
Companies and risk managers today face an increasingly complex array of risks. But for organizations that span geographies, those risks are interconnected and magnified. That thought was top of mind when we created ACE Global Accounts.
Our goal is to make managing your insurance program as easy as possible, and we structured the division that way. Our global, multidisciplinary network is dedicated to providing you, your team and your broker with comprehensive support in all areas of your program, at all times. It’s a complete approach that spans borders, lines of business and service areas seamlessly. There’s nothing easy about managing a global insurance program. We just make it easier for you.
Claims relationship management: Coordinated, real time and responsive
Much of what you’ll find in ACE Global Accounts stems from our ongoing dialogue with clients and their brokers. That’s especially true when it comes to claims. Our claims relationship management for multinational companies is now coordinated by senior claims executives at home and abroad. It’s staffed by seasoned claims professionals locally, and supported by consistent protocols and processes globally. We put the dialogue on claims where it should be – at the heart of the client relationship, throughout the lifecycle of the insurance contract. And when a claim occurs – wherever it occurs – we’ll manage it consistently and accurately, and we’ll resolve it efficiently.
Global service: Published standards, transparency and accountability
Our Global Accounts service team ensures timely and consistent administration of your program. With leading-edge technology and our expansive network, we manage globally and execute locally. We adhere to demanding performance and delivery standards, so your ACE experience will always be superior – and consistent – in terms of quality, accuracy and efficiency.
Legal and regulatory monitoring: Local knowledge drives compliance
In today's ever-changing regulatory climate, your insurance partners simply must understand local rules and customs. Our international, multidisciplinary teams have you covered. With local experts around the world, we stay on top of evolving legal and regulatory conditions in real time, so you can always be aware of the requirements that affect your program, regardless of geography.
ACE Worldview: Powerful, comprehensive and transparent
ACE Worldview, our unique and award-winning Web-based platform, puts the status of your entire insurance program at your team’s fingertips – in real time. Your team can view program and claims updates, get copies of local policies and certificates, and even access the proprietary research tools our underwriters, account managers, claims teams and legal staff use every day. That’s just a small sample of what ACE Worldview can do. You can configure it to give you what you want, when you want it – from e-mail alerts when something happens to a range of custom reports. In short, it’s the most powerful, effective and transparent tool of its kind in the industry, and it’s available exclusively to ACE clients and their brokers.
A superior alternative
ACE Global Accounts is a coordinated approach to managing the wide range of risks facing large, sophisticated businesses. It puts the power of our entire global organization at your side.
To learn more about ACE Global Accounts and how we can help you, contact us at Global.Accounts@acegroupx.com.
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This general product description is informational only. It is neither an offer to sell nor a solicitation to purchase any particular insurance product. Coverages may not be available in all jurisdictions and may be available only through appropriately licensed brokers. Refer to the Licensing Information document for a chart of the jurisdictions in which each ACE Group subsidiary is licensed.