The Civil Engineering Contractor May 2019 | Page 36
THOUGHT LEADERS
The role of guarantees
in contracting
By Peter Suremann
A guarantee could substantially improve a contractor’s working
capital — or not at all. To answer this question, one needs to
understand guarantees and insurance in some detail.
G
uarantees are not an insurance
product but rather a credit product
similar to loans, which need to be
repaid. In South Africa, guarantees can be
issued by insurance companies and banks
(collectively termed financial institutions).
The general principle of insurance is that
the contributions of the many (through
payment of premiums to an insurance
scheme) should cover the losses of the few.
Actuaries employed by the insurers ensure
that premiums are set at levels such that
the insurance losses and insurance-related
expenses do not exceed the total premium
income of the insurer. When you claim
on an insurance product, your premium
might increase after you claim or you
might lose a no-claims bonus, or in the
worst case, the insurer might not offer you
future cover if you have a very high claims
history. However, the insurer does not
have the right to recover the full amount
of the insurance claim from you — unless
there was a fraudulent claim. Your ongoing
contributions to the insurance scheme
provides the insurer enough ‘comfort’ to
continue to provide the insurance cover for
you. In the event that you stop paying your
premiums, your cover may be suspended or
cancelled in terms of the policy wording.
Guarantees are different. If there is
a claim on a contractor’s guarantee,
the financial institution that issued the
34 | CEC May 2019
Peter Suremann.
Retention guarantees
www.civilsonline.co.za