The General Conditions of Surety Insurance ("the General Conditions"), published by the Undersecretariat of Treasury, entered into force on 01.02.2014. The General Conditions, which are a novelty to our current legislation, is supposed to solve the problems of guaranty with respect to big construction projects or tenders, to remove employers' concerns relating to the performance of contractors and to replace guarantee letters issued by the banks. Information on the main features of this regulation is provided below, together with general information on the subject, types and obligations of parties affected by this regulation.
The Subject of the Insurance
Insurance companies can become a surety for debtors and provide insurance to beneficiaries against the risk of non-fulfillment of the obligation defined in the insurance policy. The content of the insurance is determined pursuant to the conditions and terms set forth in the General Conditions, as well as the special conditions of the policy.
Some of the Risk Types that may be Secured
Examples of risk types that can be insured are provided in Section A.2 of the General Conditions. Pursuant to said section without the obligation to respect the numerus clausus principle - the following risks may be secured by surety insurance:
- The risk that the party receiving advance payment for a project or the provision of a good or service does not fulfill his obligations to the beneficiary and does not refund the advance payment.
- The risk that damage occurs after a certain period after the work has been delivered due to a workmanship defect in cases where the work performance shall be evaluated after the delivery such as a construction project, engineering and production of machines.
- The risk that the employer is damaged because of the illegal practices of the workers named in the surety bond, such as fraud and embezzling.
- The risk that public receivables, which may potentially occur because of the possibility of litigation before national courts in which the customs offices, tax offices or courts are the beneficiaries, and because of the possibility of obtaining goods from customs or a mistake in customs clearing, are covered.
- The risk that payments due to subcontractors and workers are not realized.
- The risk that the employer of the Project does not fulfill his obligations in accordance with the terms and conditions determined in the agreement1.
- The risk that the debtor does not properly fulfill his obligations as set forth in the agreement.
The Obligations of the Parties
The obligations of the parties before the surety bond is concluded are as follows:
- The insurant is obliged to present immediately to the insurer the statements of account of the last year and if any, the independent auditing report and to provide the necessary explanations on this subject upon the request of the insurer2.
- The insurant is obliged to inform the insurance company about his cash or non-cash loans and the significant changes which may potentially affect the decision on providing insurance.
- The insurant cannot grant a lien or mortgage right, etc. on his assets in favor of the third parties without the knowledge of the insurance company.
It should be noted that unlike the insurant, no obligation is imposed on the insurance company for the period before the issuance of the surety bond.
After the issuance of the surety bond, it may be concluded that the parties shall fulfill the following obligations:
- The insurant shall inform the insurance company if he foresees potential damage because of a delay in the communication, on the carrying out of instructions or due to negligence after the insurance surety has been issued.
- The insurant accepts that the beneficiary shall inform the insurance company on subjects relating to the surety bond.
- On the other hand, the insurance company should pay attention to the choice of principal surety in case there is an indirect surety.
- The insurance company is obliged to delete the record of the surety from the private account where situations provided in Section B.2 of the General Conditions occur.
After the risk occurs, the following obligations shall be considered:
- The insurant shall act in order to fulfill his obligation as if there was no insurance agreement after the risk occurs.
- In case the obligation is not fulfilled and the surety becomes effective, the insurant cannot object to the request of conversion of the surety into payment with respect to its cause, amount or balance.
- The insurance company, where the beneficiary requests compensation, can inform the insurant and may ask him to take measures. However, this is not mandatory, thus the payment may be made to the beneficiary without an answer or confirmation from the insurant.
- Afterwards, the insurance company shall seek recourse from the insurant for all the compensation and legal, administrative and additional costs it paid.
Surety insurance is an essential novelty brought to our current legislation. The main purpose of this regulation is to remove insurance problems in big projects and tenders that require financing. Yet, pursuant to the General Conditions regulation provided by the Undersecretariat of Treasury, insurance companies can now grant security by acting as surety. In case the surety risk defined in the policy occurs, the insurance company pays the beneficiary and seeks reimbursement of the paid amount from the insurant.
1 In such case, the insurance company can have the work completed through an agreement with a new contractor.
2 In addition, the insurance company can demand, at every stage, detailed information on the developments and strategic changes of the debtor's activities, and important subjects concerning the credibility of the debtor. As a result of the evaluation of this information, the insurance company may request an assurance form the debtor for providing a new surety or for continuing an existing one in case his credibility is essentially distorted.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.