What are Surety Bonds? 

Article provided by Liberty Specialty Markets - APAC

Alicia Barnes
Senior Underwriter, Surety
Liberty Specialty Markets – APAC

Surety bonds are a form of security that are used to support a client’s underlying performance obligation and the security is required under a contract. In essence, a surety bond is a promise to pay should a client not meet their contractual obligations. Different to other insurance products, surety bonds are unconditional, on-demand instruments.

For example, if our client (a contractor) is constructing a building, the surety bond/s protect the building owner should our client not complete the building & help ensure they complete the project. When the client finishes the project with no issues, the bond is returned to us for cancellation. If our client fails to complete their project, the beneficiary may call on the bond because of non-performance under the contract.

Why surety bonds are a better option to bank guarantees

Unlike other countries, Australia offers unconditional on-demand bonds that are typically 5% to 10% of the contract value. The contract stipulates the amount of security required and the type of security which can be either surety bonds or bank guarantees. This makes surety bonds and bank guarantees in Australia almost identical in purpose. 

There are important differences between surety bonds and bank guarantees which make surety bonds a preferred choice for many of our clients. 

Key benefits

The key benefit of surety bonds for clients is freeing up their working capital and bank facilities. This is made possible because surety bonds are generally unsecured, compared to many bank guarantees, which are generally secured. 

Aside from only being issued by insurers, surety bonds:

  • Are an unsecured product. It’s a better option for clients because they don’t need to secure their assets or cash to support them. The client can free up their working capital and bank facilities.
  • Don’t incur upfront establishment or facility fees when a client has a facility with Liberty Specialty Markets (Liberty).

Industries and types of bonds

Surety bonds are predominately used in the construction and civil engineering industries however Liberty also provides commercial bonds, including, mining rehabilitation and workers compensation bonds. 

We provide different types of surety bonds including performance, maintenance, retention, offsite materials, advance payment as well as regulatory guarantees to both publicly traded and privately-owned companies that have revenue above A$250m.

If you’d like to know more about Liberty’s Surety Bonds, contact Alicia Barnes at Liberty Specialty Markets

Liberty* is the largest global surety. We are well placed to help contractors and businesses access the surety bonds they need to thrive. Our clients are backed by the strength of a group that’s larger than the entire Australian insurance industry.

*Liberty Specialty Markets is a trading name of Liberty Mutual Insurance Company, Australia Branch (ABN 61 086 083 605) incorporated in Massachusetts, USA (the liability of members is limited).