In an exciting collaboration between Minet Malawi, Britam, and The Daily Times - Malawi's leading newspaper - we are thrilled to introduce a groundbreaking initiative that will redefine your Wednesdays. Welcome to the Insurance Insights Column – a weekly rendezvous with the world of insurance and contemporary issues that matter. Every article aims to illuminate the intricate landscape of insurance products and relevant topics that impact us all. The articles will be educative at all levels, catering to both practitioners and non-practitioners.
As published in The Daily Times (Malawi) on April 3rd, 2024
For a layman in the street, a bond occurs where a party outside a certain contract takes upon himself to ensure that another party fulfills contract requirements. Bond contracts occur both in commercial and social agreements. In a social system, a marriage counselor - nankungwi - is a typical example of a party to a bond contract.
Insurance people define a bond as a legal instrument whereby an insurer agrees to reimburse another party should the latter suffer financial loss due to failure by a bonded party. In bonds business, an insurer is referred to as surety. The party that is assured of reimbursement in case of default by a bonded party is the beneficiary. A bonded party is known as principal.
With this background, you may be under the impression that bonds are another form of insurance. Nope. Bonds are the domain of the banking sector.
Insurers participate in bonds business because there is an element of uncertainty, vis-à-vis actual performance of the contract in the future. However, commercial banks remain prominent issuers of bonds in Malawi.
Bonds guarantee non-performance by a party to a certain contract such as construction, court and fiduciary appointments.
Construction bonds are the most commonly issued bonds in the Malawi insurance market. They come in three forms, namely, performance, bid and completion bonds.
A performance bond guarantees that a contractor identified for a certain project will complete the work, satisfactorily, in accordance with contract terms. An insurance company, thus, guarantees that the ruling contractual obligations will be fulfilled by the contractor in favor of the beneficiary, who in most cases is the owner of the project.
A bid bond is a precursor contract within a performance bond. It guarantees that in the event that a contract is awarded at the bid price and terms, the selected bidder promises to sign the contract and consequently arranges a performance bond. A bid bond, thus, covers the contractor or bidder for costs that are incurred, where upon being awarded the contract, he is unable to take the contract for various reasons.
Completion bond guarantees that if one borrows money for a construction project, one will use it solely for the intended project and that the works if so finished will be handed over to the lender as security for the loan. The principal is usually the contractor, who has financial interest in the works.
Court bond guarantees that a person, who is appointed by the court to manage property on behalf of someone will do so faithfully and to the satisfaction of the court.
When a company is winding up its operations, as we witnessed with a certain bank a couple of years ago, a liquidator (usually a lawyer or an accountant) is appointed to manage the liquidation process. One of the requirements of such appointed liquidator is to post a fiduciary bond to guarantee proper management of the winding up process.
To enter into a bond contract, the applicant is required to serve an insurer with a security or collateral. Most preferred forms of collateral acceptable by insurers are immovable property, such as land or building. Other forms include cessions, such as, shares or life policies. A collateral is a security to the insurer to hold right of one’s property in case one defaults.
There is no such a thing as ‘loss’ in bond business. Claim payouts are recovered outright through collateral. Ask any insurance person and they will probably tell you that bonding contracts are written on a ‘no loss’ basis.
For this reason, the underwriting of bonds demands discipline and care. In addition to providing collateral, insurance people will ask one to provide management accounts and latest audited financial statements. The reason is that most contractors tend to have trading problems due to taking on too much business - over trading - in relation to financial and technical resources available. In order to appraise a contractor’s expertise, the insurer will ask the contractor to provide details of contracts completed in the past.
Sometimes, insurers require that an applicant should post a counter indemnity in their favor. A counter indemnity is signed by a parent company of an applicant to guarantee that the parent company will support a subsidiary in case of financial difficulties. Bond business is a complicated transaction. It demands care on the part of the insurer.
Views from the top are that bonds are like poisonous pills - they protect a bonded party through the creation of securities, which, in the absence of a bond, would have given the injured party certain rights to seize the former’s property. Talk to us. We are here to serve.
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