Surety is not insurance in the way that a property policy is insurance. A property insurer expects to pay claims and prices for them. A surety expects to be reimbursed: if we pay a beneficiary under a bond, the counter-indemnity obliges the applicant to put us back in the position we were in before we paid. The premium buys the beneficiary a security, not the applicant a transfer of risk.
That is why the document matters so much, and why we say it out loud at the start rather than leave it to be discovered at the point of a call. An applicant who understands that a bond is a credit facility rather than a policy asks better questions about wording, about aggregate limits and about release.
Three provisions do most of the work. First, the trigger: whether we can seek reimbursement on payment or only after we have established liability. Second, the security: a parent guarantee, a charge, a cash deposit, or nothing but the covenant of the applicant. Third, and most often overlooked, the obligation to notify us of a dispute with the beneficiary early. A bond call that arrives at our desk before we have heard of the underlying argument is the worst version of every case.
Where a group is involved, we usually want the counter-indemnity from the entity that holds the assets rather than the one that holds the contract. That is not a comment on anybody’s good faith. It is that a special-purpose subsidiary with no balance sheet has nothing to reimburse us from, and a counter-indemnity against nothing is a piece of paper.
Applicants sometimes ask us to drop it. We will discuss the security and the triggers, and on a strong balance sheet the answer is often an unsecured counter-indemnity from the trading entity. What we will not do is issue a bond with no reimbursement obligation behind it at all, because that is not surety and it is not what our capital is held against.
Written by the underwriting team at FDI Insurance d.a.c., Dublin. This piece is general information, not advice on any particular transaction — and it is not an offer of insurance.
