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 August 14th, 2024
During my childhood, my friends and I used to take goats to a dambo that was close to our small village. While the animals were munching green napier grass, we could stealthily sneak into a nearby sugarcane field and help ourselves with a few canes.
Lo, one day, the owner caught us in the act. We were taken to the village headman. Our parents were summoned to guarantee that what we had done, was not going to happen again.
The village headman, by powers vested in him, made it clear to all that if we were caught stealing sugarcane again, our parents who had acted as guarantors – sureties - were going to be flogged at the village headman’s court, on our behalf. Sounding repentant, we continued to take the animals to the dambo - after all this was the only suitable place to take animals for grazing.
Old habits die hard. We were at it again and caught.
As per agreement, our parents were taken to the village headman’s court. You can guess what happened thereafter.
This brings us to today’s topic – bonds: paying for others.
The idea of bonding is not a new phenomenon in our societies. In the old Palestine, if a newly-constructed building collapsed and killed its inhabitants, the penalty was to behead the builder’s children.
Our courts of law, today, often demand that an accused person or suspect of a crime, should put in surety in bail application. If the suspect jumps bail, the one who put his name in as surety or guarantor is in trouble.
So what is a bond?
In simple terms, a bond is where a party outside a certain contract takes upon himself to ensure that another party fulfills curtained pre-agreed requirements or obligations - just like our parents in the story, above.
Insurance people define a bond as a legal instrument whereby an insurer (the surety), agrees to reimburse another party (principal), should the latter suffer financial loss due to failure or default by the bonded person (the contractor).
With this background, you may be under the impression that bonds are another form of insurance. Big no. Bonds are banks’ business.
Insurers participate in bonds business because there is an element of uncertainty vis-à-vis actual performance of the contract in future. However, banks remain main issuers of bonds in Malawi market and world-over.
In this article, we discuss surety bonds issued by insurance companies.
So many times, I have come across newspaper adverts, government inviting bids from the public. One of the conditions or requirements of the tenders stipulates that ‘all bids must be accompanied by a bid security of not less than x percent of the bid amount.’
This requirement is not insurance per se but verily has a bearing on insurance. If the successful contractor does not perform in accordance with the terms of the contract - by not delivering the required materials or abandoning a contracted project - government suffers loss. The insurer must make good to government by paying a sum of money equal to amount of bond – penal amount - entered with the contractor.
Despite being issued by insurance companies, bonds and insurance contracts differ in a number of ways.
A bond is a contract of guarantee while insurance is a contract of indemnity - although both guarantee another party against financial loss.
Insurance involves two parties - insured and insurer. Parties to a bonding contract are tripartite - three parties are involved. The three parties are the insurer - called the surety; the protected party - called the beneficiary or contractor and the owner of the project or tender – called the principal.
Insurance is cancellable by either party having given notice of cancellation. This can arise due to non-payment of premium or breach of warranty. In bonds business, the surety is liable to the principal on behalf of the contractor regardless of breach of warranty or fraud on the part of the principal and or beneficiary. In other words, the bond cannot be cancelled unless all obligations have been fulfilled by the contractor.
Views from the top are that underwriting of bonds is not simple. It requires special expertise on the part of the surety and the insurance broker witnessing the contract. One small mistake can cost an insurance company billions of Kwachas in claims. Contractors, too, need to be careful when choosing insurers and insurance brokers, especially in a booming construction period like the one Malawi is currently going through. Talk to us. We are here to serve you.
Comments
Post a Comment