Bonds section B 23

1. Introduction

Bonds, which may be required in almost every sphere of inter-personal and inter corporation transactions are very wide in scope, Generally speaking, it is not a form of insurance business but because of the fact that insurance companies are financial institutions, their bonds are acceptable, hence the involvement of insurance companies in bonding business, particularly those bonds which can generate other classes of insurance business for example, bonds business which are secured together with other project insurances like the Contractors'/Erection All Risks, Public Liability and Workmen's Compensation insurance.

Under the PIAM's Bond Underwriting Guidelines, the total bond business which an insurer can underwrite is limited to 5% of the total gross premium of the company based on the previous financial year (not restricted to new business only but can include extension of existing contracts, ie on total).

There are certain peculiar features in Bonds :

a) A bond once given, cannot be cancelled before its expiry date.

b) All bonds issued to contractors for government projects are demand bonds and are worded in such a way that they can be invoked by the holder of the bond without any reason and explanation. Insurer is obliged to pay upon demand notwithstanding any dispute or protest by the contractor or insurer or any third party.

2. Company Attitude

Bonds are not really attractive business to do and the company's attitude towards bond business are :

a) We are only prepared to write this business on a very selective basis and even then it should be considered as a facility we provide to our agents, brokers and clients who have given us good support.

b) This class of business is never to be written on its own without the other classes of insurance.

c) All bond business must be carefully underwritten particularly in regard to documentation and procedure.

d) All bond business must be written in accordance with PIAM's Bond Underwriting Guidelines (effective date: 1st'May 2000).

3. Type of Bonds
The following are the various types of bonds which are governed by the PIAM's Bond Underwriting Guidelines.

a) Bid and Tender Bonds
This is a guarantee required by the Principal when a tender is submitted for a project. It guarantees the Principal against the failure of the contractor who has been awarded the contract to fulfill the obligations of the contract prior to the commencement of work on site.

The bond value is usually a fixed amount determined by the Principal.
This is about the best bond business available as the risk is low and we are prepared to write it on its own, even without other supporting business and we are prepared to give such bonds to experienced engineering contractors, planting contractors and general maintenance contractors.

b) Performance Bonds
A performance bond guarantees the Principal against the failure of the contractor to complete the project or to perform in accordance with the conditions of the contract. The bond value is usually 5% of the contract value but this may vary.

The scope of the performance bond is as wide as the contractors' obligations under the contract and such obligations are not normally spelt out in the wording of the bond. When in doubt on this, a copy of the contract should be obtained and examined in detail.

c) Advance Payment Bonds
This type of bond is only allowed for Government Contract under the PIAM's Bond Underwriting Guidelines.

This guarantee is requires by the Principal should the Principal agrees to make a temporary advanced payment to the contractor towards the cost of contract work prior to the commencement of work by the contractor. The bond value is usually about 15% of the total contract value.

Such advance payment will be repaid in stages by the contractor out of the progress payments for works executed. However, if the contractor abscond with the money before work commences or abandoned the project midway before the Principal could fully recoup its advance payment out of the progress payment, the Principal has the right to invoke the bond.

This type of bond can be quite tricky and must be written most carefully. The contractor must be sound, both technically and financially and have a good track record. The most undesirable contractors are those companies who are set up to use their political advantage (not their experience and track record) to get contracts and then sub-contract the entire project to someone else. Under such arrangement, the main contractor usually loses control over the project and unless the sub-contractor is reputable and has a good track record, chances that the project will fail is much higher than a contractor who retains substantial control over the project.

d) Supply Bonds
This is a guarantee required by the Principal from the contractor to guarantee the Principal against the failure of the contractor to fulfill the obligations to supply goods or services under the contract. The bond value is usually a fixed amount determined by the Principal in lieu of cash deposit.

Under the PIAM's Bond Underwriting Guidelines, the limit of exposure for such bonds are: 
i) RMI00,000 for non-government body. 
ii) 10% of the aggregate value of 50 times the Shareholders 
    Fund for government body.

We are prepared to consider writing this type of bond in certain circumstances, although on the whole we are not particularly keen about it.

Before we are prepared to consider, the following conditions must be satisfied: 

i) The contractor is experienced and the business is doing well.
ii) The contractor is in complete control of the supply preferably 
    as the manufacturer or the sole agent.
iii) The contractor is not a "one deal"
    fronting operation.
iv) The product is not of specialized nature
    so much so that there is no substitute.
v) The contractor is already our customer or we will have good 
    prospect of writing his business in future.
    Each application will be considered on a case by case 

e) Customs and Exercise Bonds
Under the PiAM's Bond Underwriting Guidelines, such bonds are restricted to Re-export Bond, Warehouse Bond and Duty Free Bond.
This type of bond is a guarantee given to the Director General of Custom Malaysia to guarantee the successful implementation of the storage/ mobilization/ shifting of dutiefied goods and also the payment of Custom Taxes/ Excise Duty/Sale Tax/ Service Tax/ Fines payable by the company applying for the bond.
The bond value is a fixed amount determined by the Principal.
Such bonds are not preferred by the Company due to its high risk and should be avoided.

f) Foreign Workers Bonds (excluding Foreign Maids)
This guarantee is required by the Immigration Department from an employer under Regulation 21 of the Immigration Regulations. It guarantees to pay the Director General of Immigration of Malaysian up to a maximum aggregate sum of the bond value, in the event that anyone of foreign workers be repatriated in the course of stay in Malaysia.
The duration of the bond and bond value for each foreign worker is fixed by the Immigration Department and it varies from countries to countries.

Under the PIAM's Bond Underwriting Guidelines, the maximum bond that an insurer can underwrite per employer is RM500,000.
Insurance Guarantees are not acceptable to the Immigration Department, hence application has to be made by the Company to the Bank for the issuance of Bank Guarantees.
Foreign workers bond can be written by Company in view of its favorable claims experience.

g) Administration and Estate Duty Bonds
    These type of guarantee is not usually underwritten by the 
    company except on an accommodation basis.

4. Bond Format and Wordings

This must be established from the contractor/proposer. For Performance Bond the requirement is normally spelt out in the "Letter of Award" between the contractor and its principal. It stipulates whether the Bond to be issued is by way of "Insurance Guarantee" or "Bank Guarantee".

If an Insurance Guarantee is acceptable, this will be issued under our company's letter head.

However, if a Bank Guarantee is required, we will arrange with a bank to issue the guarantee on our behalf.

The PIAM Bond wording should be used in all cases except where the principal is government agencies.

Where the contract principals other than a government agencies specify a wording
different from the PI AM wording, the wording must be studied carefully to ensure
that there are no major differences in the 2 wordings.

5. Bank Guarantees for Government Agencies

Under the PIAM's Bond Underwriting Guidelines, insurers are prohibited from issuing counter-guarantees on bank guarantees for government agencies.

In respect of insurance guarantees and/ or bonds issued by insurance companies to contractor for government projects, such guarantees/bonds shall be executed "on demand". 

Insurer is obliged to pay the beneficiary of the guarantee/bond upon demand notwithstanding any dispute or protest by the contractor or insurer or any third party and without proof of conditions. Payment shall also be made within 30 days from the receipt of the demand for payment.

6. Letter of Indemnity

Letter of Indemnity in the PIAM approved wordings must be obtained from the contractor who should have a net worth greater than the sum insured on the Bond after making allowances for other Bonds also counter-guaranteed by the same person.
In the case of a company, the corporate counter-guarantee should be accompanied also by personal letters of guarantee signed by all directors.
Where necessary, we should also request for a counter-indemnity from independent third party guarantors to strengthen our chances of recovery in the event of any default by contractors and the bond is invoked.
All letters of indemnity must be witnessed by a Commissioner of Oaths or other relevant parties.
All letters of indemnity must be dated and signed prior to or concurrent to the date of issue of the Bond; otherwise the validity of the indemnity(ies) could be in doubt.

1. Pendahaluan

Bon, yang mungkin diperlukan dalam hampir setiap bidang antara urusniaga perbadanan dan antara peribadi yang sangat luas dalam skop, Secara umumnya, ia bukan satu bentuk perniagaan insurans tetapi kerana hakikat bahawa syarikat-syarikat insurans adalah institusi kewangan, bon mereka akan diterima, maka penglibatan syarikat-syarikat insurans dalam perniagaan jaminan, terutama-nya mereka bon yang boleh menjana kelas perniagaan insurans yang lain sebagai contoh, perniagaan bon yang akan diperolehi bersama-sama dengan lain insurans projek seperti Insuran Ereksi Kontraktor '/ Semua Risiko, Liabiliti Awam dan Insuran Pampasan Pekerja.


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SPA 4th Principal Bond Forms and Checklist for Underwriting purpose  Nov 6, 2012, 8:12 AM YVONNE WONG
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Payment instruction to insurer for your insurance transaction. 信用卡付款指令,保险公司的保险交易。Pembayaran Kad Kredit arahan kepada syarikat insurans untuk transaksi insurans anda.  Dec 13, 2012, 6:40 AM YVONNE WONG