Bonds offered by the bank are usually fully secured against the company assets and have a direct impact on a contractors’ working capital facility. The wordings can be onerous, on-demand, with no room for negotiation leaving the contractor potentially exposed in the event of a claim with little defence regardless of how the contract is performing.
By contrast, a bond from the insurance market is ‘off balance sheet’ and is usually not secured beyond a group
counter indemnity.
The bond wording issued by an insurance company is usually ‘conditional’ whereby the employer needs to demonstrate that it has suffered damages as a result of contractor default before a claim is successful, ensuring the contractor retains the benefit of the contractual terms and conditions that it negotiated before signing the contract. Pricing is surprisingly similar with insurance companies being very competitive even though they often do not have the same security as the banks.