Legally both perform the same function – the client receives security. The practical difference: a bank guarantee normally uses the bank credit limit granted to the company, whereas for an insurance bond the insurer grants a separate bond limit; in both cases there is a financial assessment and there may be security and rights of recourse. Most clients in Latvia accept insurance bonds, but individual tender regulations may require a guarantee from a credit institution specifically – this has to be checked before submitting a bid.
When this answer applies to your situation
- The tender regulations require bid, performance or warranty period security.
- The company wants to keep its bank credit limit free for working capital.
- Several bonds for different projects have to be maintained at the same time.
What can change the answer
- The wording of the tender regulations: whether they accept "a guarantee from a credit institution or an insurer" or only from a bank.
- The required form of the guarantee (on first demand, unconditional) – the text must match the requirement.
- The company's financial position – it determines the insurer's terms and the counter-indemnity requirements.
- The term: the guarantee has to cover the whole required period with a margin.
What to check in the policy or quote
- The wording of the security requirements in the tender regulations or the contract
- Whether the guarantee text matches the required form
- The term and the procedure for extending it
- Recourse and counter-indemnity terms (what happens if the guarantee is paid out)
- How quickly it is issued and whether a limit is available for the next projects
The typical mistake
The bond is only arranged in the last week of the tender. The first time round the insurer needs a financial analysis – without a limit set up in advance, the deadline may be missed.
Example
A situation typical in practice (generalised example, not a specific client)
A typical situation: a construction company wins a tender and has 5 working days to submit a performance guarantee of 10% of the contract price. With a bond limit approved in advance the bond is issued within a few days, without tying up the bank limit; without a limit – the process may not fit within the deadline.
Related content
Sources and basis
This answer is based on Kristaps Račko's practice as a broker; it is not individual insurance advice. General regulatory context: Apdrošināšanas un pārapdrošināšanas izplatīšanas likums, the Latvian Insurance and Reinsurance Distribution Law (likumi.lv); supervision of brokers – the Bank of Latvia register.
This is not individual insurance advice; actual cover always depends on the chosen insurer's wording and the special conditions of the policy.