Who needs this solution
- Construction contractors – public procurements and private contracts often require performance and defects liability security;
- suppliers and service providers – bid bonds in tenders, advance payment bonds in prepayment transactions;
- manufacturers and installation companies – performance bonds for equipment supply and installation contracts;
- companies running several projects in parallel – a guarantee facility limit makes it possible to obtain bonds quickly, without arranging each one from scratch.
The main types of guarantee
| Type | What it secures | When it is required |
|---|---|---|
| Bid bond | That the winning bidder will sign the contract and provide performance security | When submitting a tender |
| Performance bond | That the contract will be performed in accordance with its terms | On signing the contract, usually a % of the contract price |
| Advance payment bond | That the advance received will be used for the contract or repaid | Where the contract provides for prepayment |
| Defects liability bond (maintenance bond) | That defects identified during the defects liability period will be remedied | On handover of the works, for the defects liability period |
Insurance guarantee or bank guarantee?
Legally, both forms perform the same function – the client receives security. The practical differences that are usually decisive for a company are these:
- Cash flow. A bank guarantee normally uses the bank credit limit granted to the company, whereas for an insurance guarantee the insurer grants a separate guarantee facility limit; in both cases there is a financial assessment and there may be collateral and rights of recourse.
- Collateral. The requirements differ from case to case: an insurer may also require counter-guarantees or sureties, although in practice these tend to be more flexible than at a bank.
- Speed once the limit is in place. With an approved guarantee facility limit, an individual bond can be obtained very quickly.
- Acceptability. Most clients in Latvia accept insurance guarantees, but some tender documents specifically require a bank guarantee – this has to be checked before the tender is submitted.
What the standard process often overlooks
- The bond wording does not match the tender documents. Clients often require a specific form (an on-demand guarantee, particular revocation terms). Non-compliant wording can be grounds for rejecting the tender.
- Mismatched periods of validity. The guarantee must be in force for the whole of the required period with a margin to spare; if the contract is extended, the bond has to be extended too – which is easy to forget.
- The size of the limit is not aligned with growth. If the company is planning several procurements, the limit has to be sized ahead, not just for today's project.
- The recourse terms are not read. If the guarantee is paid out, the insurer recovers what it paid from the company – the counter-guarantee and surety terms have to be assessed carefully.
- The defects liability bond is not budgeted for in the estimate. It will be needed at handover of the works – including if the financial figures have changed in the meantime.
Decision table: what to check before taking out a bond
| Question | Why it matters | What to check | Consequences of not checking |
|---|---|---|---|
| Do the tender documents accept an insurance guarantee? | Some tender documents require a bank guarantee only | The wording of the security requirements in the tender documents | The tender is rejected on a formal ground |
| Does the guarantee wording match the required form? | The client is entitled to reject a non-compliant bond | The on-demand condition, the revocation procedure, the jurisdiction | Having to redraft in a rush before the deadline |
| Does the validity period cover the whole of the required period? | Contract extensions are common | The expiry date and the procedure for extending the bond | An uncovered period; breach of contract |
| What are the recourse and counter-guarantee terms? | If the bond is paid out, the insurer will pursue the company | The scope of the counter-guarantee, the sureties, the collateral | Unforeseen liabilities for the owners |
Information and documents required
- The tender documents or the contract with the security requirements
- Financial statements for the last 1-2 years
- A current management balance sheet and profit and loss account
- A list of existing contracts and guarantees (the portfolio)
- Details of experience on similar projects
- The facility limit you would like for future projects
What affects the price and the terms
The main factors: the company's financial position and track record, the type and amount of the guarantee, its term, the risk attaching to the project and to the client, and the guarantee portfolio as a whole. Strong companies with a facility limit already in place normally obtain considerably better terms than a one-off transaction "off the street". Specific rates depend on the situation – the insurer quotes them after its financial analysis.
Exclusions and limitations
Surety bonds and guarantees are not classic "insurance against loss" – they are a form of surety. If the client calls the guarantee, the insurer recovers the amount paid out from the company by way of recourse. A guarantee therefore does not replace project risk management: it protects the client, while the company's own risks are covered by other policies – for example, CAR/EAR for construction works.
How I work with guarantees
I help you choose the form of bond that suits the transaction, align the guarantee wording with the requirements in the tender documents, prepare the financial information for the insurers' analysis and – for companies with a regular flow of projects – put a guarantee facility limit in place so that subsequent bonds can be obtained quickly and predictably. Where necessary, I compare the terms of several insurers, not only the price: both the counter-guarantee requirements and the speed of issue differ.
A practical example
A typical situation (a generalised example, not a specific client case): a construction company wins a public procurement and has five working days in which to provide a performance bond. A bank guarantee would require additional collateral and would reduce the credit limit needed for working capital. With an insurance guarantee facility limit set up in advance, the bond can be issued within the deadline without tying up cash – and the guarantee wording has already been agreed against the requirements in the tender documents.
Frequently asked questions
Do clients accept insurance guarantees in the same way as bank guarantees?
Most clients in Latvia, including in public procurement, do accept insurance guarantees. Some tender documents, however, specifically require a guarantee from a credit institution – so the wording of the security requirements has to be checked before the tender is submitted.
How quickly can a guarantee be obtained?
If the company already has an approved guarantee facility limit, an individual bond can usually be issued within a few working days or sooner. For the first time round you need to allow for the financial analysis process – that normally takes longer, so it is advisable to arrange the limit in good time, not on the last day of a tender.
What happens if the client calls the guarantee?
The insurer pays the client the amount provided for in the guarantee and then pursues the company by way of recourse under the counter-guarantee agreement that has been signed. The guarantee protects the client – for the company it is a liability, not insurance.
Can a new company with no track record obtain a guarantee?
It is harder, because the decision is based on financial figures, but there are usually solutions – for example, additional collateral or an owner's personal guarantee. I assess each situation individually before approaching insurers.
Does a guarantee facility limit cost anything if it is not used?
It depends on the insurer's terms: the charge is usually calculated on the bonds issued rather than on the limit itself, but terms differ – this is one of the points I compare between quotes.
Insurance broker, partner at SIA EURORISK. 18+ years in insurance. About me →
Methodology and sources
This page combines the Latvian legal framework with a broker's practice. The practical observations (for example, the typical gaps in cover) are Kristaps Račko's professional observations, not market statistics; the actual cover always depends on the chosen insurer's wording and the special conditions of the policy.
- Publisko iepirkumu likums, the Latvian Public Procurement Law (likumi.lv) – tender and contract security, including a guarantee issued by an insurance company
- Kristaps Račko's practice as a broker – structuring bonds and aligning them with the requirements of tender documents
This page provides general information about insurance guarantees (surety bonds) and is not individual insurance advice. Actual cover always depends on the chosen insurer's wording, the special conditions in the policy and your situation – we will assess those together before any decision.