Construction insurance questions, answered

In a construction context there are a myriad of micro and macro-economic risks which could impact a project’s success. This is where Guarantees come in, they are an important tool to mitigate the risk for the Employer and their project funders. A guarantee gives the employer financial security against a contractor's default. What each type secures differs: a performance guarantee answers the increased cost of completing the works, a retention guarantee the obligation to put defects right after completion, an advance payment guarantee repayment of the advance, and a bid bond the cost of re-tendering.

Common types are Bid/Tender, Performance, Advance Payment, and Retention guarantees. The right type and wording depend on your contract and stage of works. • Performance Guarantees, which protects the Employer against the increased costs of completion as a result of non-performance. • Retention Guarantees, which enable the recovery of retention funds paid to address remedial works. • Advance Payment Guarantees, enables contractors to be prefinanced by making payments before the commencement of the contract. • Bid Bonds, which cover the costs of re-tendering or re-negotiating, if the awarded contract cannot be fulfilled by the appointed contractor.

There are typically three parties to a Guarantee: The Employer, also known as the “Principal Creditor” or the “Beneficiary” who awards a contract to the Contractor who is also known as the “Principal Debtor”. In order to attain the appropriate security, the Employer will require the Contractor to furnish a Guarantee, and that is issued by the Guarantor, an insurer, also referred to as the “Co-Principal Debtor”. CivilSure is the intermediary that arranges it, not the party that issues it.

A construction guarantee and a bank guarantee are different instruments. Points contractors raise with us: wording on a construction guarantee can often be tailored to the contract, while banks generally work off their own standard forms; and a construction guarantee does not usually require a pledge to a lending institution, so it does not use up the facility your bank has given you. Expiry is set by each instrument's wording, and construction guarantees are often written to run to a stage of the works such as practical or final completion, while bank guarantees more often carry a fixed calendar expiry. Which suits you depends on your contract, your balance sheet and what the employer will accept.

It is important to remember that the Contractor wants to avoid a Guarantee from being called up at all costs as it will have a severe impact on the Contractor’s credit status, reputation, and can potentially lead to the liquidation of the Contractor. Even if liquidation is avoided, the damage to the Contractor’s reputation could prevent Guarantors from supporting the Contractor with future contracts and / or drastically alter the premium and collateral terms. Guarantees are similar to credit or financing a business in that they finance your risk, and that the Guarantor has right to indemnity in the event that the Guarantee be called up.

No. CivilSure is not appointed to a single guarantor. We prepare your submission, take it to more than one guarantor, and go through the terms and the wording each of them comes back with so you can weigh them against what your contract requires. What is available, and on what terms, is decided at underwriting.

Expect a minimum premium, plus admin or re-issue fees and Statutory Levies.
Some facilities also require collateral, which is held as security rather than charged as a fee and is refundable once the guarantee has expired or been returned and anything owed has been settled. If a guarantee is called, the guarantor may apply those funds to its loss.
We set out the costs we know of before you commit: premium, any minimum premium, admin or re-issue fees, statutory levies, and any collateral requirement. Some are only fixed once underwriting is complete.

Often yes. Where your guarantee wording allows milestone reductions, the amount can step down at 50% certified, at Practical Completion and at Final Completion. Send the certificates and progress documents as soon as they are issued, so the reduction can be applied. Capacity here means the available limit, or room, you have within your guarantee facility to issue new guarantees.

Sometimes. Excluding director surety usually requires a stronger alternative security package, such as cash collateral, a bank account cession, unencumbered property or a project account. CivilSure structures and negotiates that with underwriters, and what is accepted is decided at underwriting.

Underwriters may consider one or a combination of the following, and what they accept is decided at underwriting:

• Unencumbered property
• Cash collateral or a ring-fenced bank account cession
• Investment Accounts
• Project bank account or escrow-style retention alternative

No. There is no law that forces shareholders to sign. Many guarantors ask for it. Whether it is required depends on your financials, project profile, control, and what alternative security you can offer. CivilSure negotiates that on your behalf.

Sometimes. Cash collateral equal to the guarantee amount is one of the security structures underwriters consider, and it can change the picture where financials are the obstacle. It is not an automatic approval: the application still goes through underwriting and the guarantor decides. Where it is accepted, the funds sit in a pledged or blocked account until the guarantee expires and its claims window closes, and you still pay the issuer’s guarantee fee. There may also be tax consequences to lodging collateral and to the guarantee fee. CivilSure is not a tax adviser and gives no tax opinion. Speak to your own tax adviser.

• Often less reliance on broad personal sureties
• Usually accepted by employers
• Pledged funds may earn interest, depending on the bank

No. Collateral is set case by case and can range from 0% to 100%, sometimes on a pooled facility, sometimes per guarantee. Quick example: Contract R100m → 10% guarantee = R10m. If the issuer wants 20% collateral, you lodge R2m, not 10% of the contract. How to reduce collateral: Aim for surety-style wording where accepted, offer alternative security, or negotiate step-downs after milestones. How CivilSure helps: we prepare the submission and negotiate the security package with underwriters, including pooled collateral where a facility allows it. The collateral a guarantor requires is set at underwriting.

If you default or fail to honour your defect obligations, the employer may call on the retention guarantee. The guarantor responds up to the guaranteed amount, on the terms of the guarantee, so the employer can fund the outstanding remedial work. The guarantor will then hold you liable under your indemnity and expect reimbursement of the amount paid.

• Improves cash flow (you receive full progress payments without deductions).
• Shows professionalism and financial strength.
• Still satisfies the employer’s need for protection against defects.

Two things to weigh against that: the guarantee protects the employer and not you, and you indemnify the guarantor, so if it is called you are liable to reimburse it. Replacing cash retention needs the employer's agreement under the contract.

• If the contractor fails to: Correct defects within the agreed period. Honour obligations during the defects liability period. Return to site when requested to fix defective workmanship or materials.

No.

• A Performance Guarantee secures the overall completion of the project. A Retention Guarantee specifically secures the correction of defects after completion.
  They serve different purposes but often run side by side.

Not always. Some employers prefer cash retention, while others accept retention bonds. Public sector and larger private contracts often specify them.

A bid bond application asks for the following:

• Your company’s financials and CIPC documents.
• Details of the tender (employer, value, closing date).
• Your previous construction experience.
  The guarantor assesses the application and, if it is accepted, issues the bond.

Not usually. A guarantor may ask for some form of security where financials are weak or the tender value is high. In our experience bid bonds are commonly issued against the premium alone, but whether collateral is required is decided at underwriting.

No. It is not a deposit. You pay a premium (a fee) for the guarantee to be issued.

No. They are mostly required on public sector projects, large commercial contracts, and by certain employers who want extra assurance.

Bid Bonds give the employer security that the bidder, if awarded the contract, will enter into the agreement and provide the performance guarantee the tender requires. If the awarded contractor does not, the employer may demand payment under the bond up to the bonded amount, on the terms of its wording. The bond is not a cash deposit: you pay a premium for it to be issued, and if it is called you remain liable to reimburse the guarantor under your indemnity. Some tenders allow a cash deposit as an alternative instrument, and the tender document says which it accepts.

The excess is the portion of the loss you pay yourself. The insurer considers the balance on the policy wording and up to the limit on your schedule. The excess varies by item, claim type and risk factor, for example theft or overturning, and it is shown on your schedule.

• Proof of ownership or hire
• A police report (for theft or malicious damage)
• Maintenance and service records
• Photographs of the damage
• Operator license (if applicable)

Yes, cover can be structured to apply across multiple construction sites and, in some cases, associated companies, if this is declared and approved by the insurer.

Yes, many contractors choose to cover hired-in plant under their own PAR policy rather than take the rental company's cover, because the hire agreement usually leaves them responsible for damage while the plant is in their custody and control. Cover depends on the plant being declared and on the policy wording.

If the contractor does not spend the money on the materials, contractors or equipment as agreed upon in the contract.

Liquidation of the Contractor’s business is one of the most common reasons for a Guarantee to be called up. Liquidation automatically places the Contractor in default of the contract and will thus trigger a claim for the Advance Payment Guarantee. The Employer needs the project to be completed and will have to arrange for a replacement Contractor. This causes delays and an inevitable increase in costs.

The Contractor expressly refusing to perform his obligations and perform under the contract gives the Employer the right to terminate immediately and call up on the Advance Payment Guarantee.

Where the contractor is in breach of the contract, the employer may be in a position to demand payment under the advance payment guarantee for the advance that has not been repaid. Whether a demand is valid depends on the wording of the guarantee issued.

No, PI covers financial loss caused by professional negligence. Physical damage or injury is typically covered under Public Liability or Contractors All Risk insurance, unless directly caused by a design flaw.

Not by statute for every contractor. Some professional councils, and many consultant appointments and construction contracts, require it, so whether you need it is set by your appointment and your contract rather than by law.

• Design miscalculations causing financial loss
• Incorrect specifications on a design
• Inadequate advice
• Breach of statutory duty or professional regulations

• Retroactive cover allows your current PI policy to answer work done before the policy start date, usually back to a specific “retroactive date” shown on the schedule. It is what keeps a run of consecutive policies from leaving a gap for earlier work.

No. Professional indemnity does not cover poor physical workmanship. It answers professional errors in advice, design or documentation that cause financial loss. Physical work that was simply built badly is a construction matter, and contract works policies commonly treat the defective work itself differently from the damage that flows from it, so the wording decides it.

Yes, you can be held liable for your subcontractor’s work, because your client has a contract with you and not with them. Your PI policy may answer this where it includes a subcontractors extension, but it does not cover the subcontractor directly. They would need their own PI cover, which matters particularly if you claim against them for damages.