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