Guarantee is a licensed class of non-life insurance business
Guarantee business is not an informal accommodation. It is a named class of non-life insurance business under South African law, which means it can only be written by an insurer licensed for that class and is subject to the prudential and conduct requirements that attach to it.
The statutory description of the class is broad. It covers loss resulting from insolvency, from the direct and indirect failure of a person to discharge an obligation, and from suretyship offered as part of normal business activities. It expressly excludes a guarantee issued by a bank registered under the Banks Act, 1990, which is the practical dividing line between an insurer-issued guarantee and a bank guarantee drawn against a client's facility.
The distinction matters commercially. A bank guarantee is normally counted against the borrower's facility and is usually cash-backed or secured against assets. An insurer-issued guarantee is a separate underwriting decision that does not, of itself, consume the bank facility, which is the reason most applicants approach the guarantee market in the first place.
Source: Insurance Act 18 of 2017, Schedule 2 read with Table 2 (Classes and Sub-Classes of Insurance Business, Non-Life Insurance), Class 13 (Guarantee).
Demand guarantees and accessory suretyships behave very differently
The single most important question about any guarantee is whether it is a demand guarantee or an accessory suretyship. A demand guarantee creates an independent obligation owed by the guarantor to the beneficiary. An accessory suretyship is tied to the underlying contract, so a dispute about performance under that contract can be raised against a call on the security.
The Supreme Court of Appeal has treated properly drawn construction guarantees as independent of the underlying contract, comparing them to irrevocable letters of credit used in international trade. On that approach the guarantor's obligation to pay is triggered by a compliant demand, and the narrow exception is proof of fraud on the part of the beneficiary. The guarantor is not required to investigate the propriety of the claim.
That independence has been applied firmly. In a 2013 appeal the court confirmed that liability under a construction guarantee was absolute and unconditional, that disputes under the principal construction agreement were precluded, and that an earlier majority decision to the contrary was clearly wrong.
The label on the document does not settle the question. The court has observed that what is called a guarantee may in truth be no more than an accessory obligation, and that it is the terms of the guarantee itself that determine its nature. Two documents with the same heading can therefore produce entirely different outcomes when a call is made.
Source: Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd 2010 (2) SA 86 (SCA); Coface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association 2014 (2) SA 382 (SCA); Compass Insurance Co Ltd v Hospitality Hotel Developments (Pty) Ltd 2012 (2) SA 537 (SCA).
A demand must comply with the terms of the guarantee
Independence cuts both ways. Because the guarantor looks only at the guarantee, the beneficiary must make a demand that matches what the guarantee requires. Where a guarantee required a court order placing the contractor in liquidation to be attached to the demand, and no such order was attached, the demand was non-compliant and the guarantor was not liable to pay.
The court in that matter expressly declined to decide whether strict compliance is required for performance guarantees, because the requirements in the document were clear and had simply not been met. The practical lesson is narrower but more useful than the strict-compliance debate: the demand must do what the guarantee says, including attaching any document the guarantee calls for.
For a beneficiary this means reading the demand mechanics before relying on the security. For an applicant it means understanding precisely what event allows a call to be made, because that is the event the business is exposed to.
Source: Compass Insurance Co Ltd v Hospitality Hotel Developments (Pty) Ltd 2012 (2) SA 537 (SCA) at paragraphs 13 to 15.
Construction and engineering projects
Construction is where guarantees are most familiar. A contractor may be required to provide security at tender stage, again on award, again when an advance payment is made, and again when retention is released. Each of those is a different instrument answering a different risk at a different point in the project.
Standard form contracts set the expected amounts. Under the JBCC Principal Building Agreement the employer may require either a fixed construction guarantee of 5% of the contract sum, or a variable construction guarantee with an initial value of 10% of the contract sum which reduces automatically as contract milestones are met. The FIDIC forms take a different approach and leave the amount of the performance security to be stated in the contract particulars, so it is project-specific rather than fixed by the form.
Read the construction guarantees guide →
Supply and service contracts outside construction
Not every contract that requires security is a building contract. Supply agreements, outsourced service contracts, maintenance agreements, concession arrangements and public-sector tenders frequently require a bond even though no construction work is involved.
These contract bonds borrow the mechanics of construction security but sit against a different obligation, which changes what the underwriter examines. Delivery capacity, supplier arrangements, order books and the consequences of late or defective supply matter more than site programmes and practical completion.
Read the contract bonds guide →
Customs, excise and cross-border trade
Importers, exporters, clearing agents and licensed warehouse operators deal with a customs authority that can make release of goods conditional on security being in place. Deferred payment arrangements, rebate stores, licensed warehouses, temporary imports and goods removed in transit each attract their own bond requirement.
The security requirement is a condition of moving goods and of holding a licence, so it is a gating item rather than an optional protection. A business that cannot produce the bond cannot operate the facility.
Read the customs bonds guide →
Fiduciary appointments and the Master of the High Court
Executors, trustees and curators are appointed to administer property that belongs to somebody else. South African law responds to that by requiring security to be furnished to the Master of the High Court in defined circumstances, so that the estate, the trust or the person under curatorship is protected if the appointee defaults.
These are commonly grouped as court bonds or fiduciary bonds. Each appointment has its own statutory basis, its own exemptions and its own circumstances in which the Master may dispense with security, which is why they are treated separately rather than as one product.
Read the court bonds guide →
Fuel supply and wholesale credit
Fuel is bought in large volumes on short credit cycles, and the supplier carries meaningful exposure between delivery and payment. Wholesalers and oil companies routinely require security before opening or extending a credit line to a retailer or a reseller.
A guarantee in this setting is about access to trading terms rather than about protecting an asset. It is a different question from insuring the forecourt, the tanks, the shop and the liability exposures of a filling station, which is dealt with separately.
Read the fuel guarantees guide →
Mining rehabilitation and environmental obligations
A mining or prospecting operation must make financial provision for the rehabilitation and remediation of environmental damage, and must maintain that provision until a closure certificate is issued. The law expressly lists a financial guarantee from an institution registered under the applicable financial sector legislation as one of the permitted vehicles for that provision.
The alternative is normally cash deposited into an account administered by the Minister responsible for mineral resources, or a dedicated trust fund. For an operating mine the difference between a guarantee and a cash deposit is the difference between deployable capital and capital locked away for the life of the operation.
Read the mining rehabilitation guarantees guide →
Transport, ports and logistics
Freight forwarders, transporters, shipping agents and terminal users deal with authorities and infrastructure operators that require security before credit facilities, port access or licensed activities are granted. The security supports the trading relationship rather than a single contract.
Read the logistics guarantees guide →
Where guarantees meet structured risk financing
Businesses that place a steady volume of guarantees, or that carry a predictable level of retained risk, sometimes look at whether that exposure should be financed rather than simply transferred each year. Alternative risk transfer structures, including cell captive arrangements, are used to build reserves against a known exposure over time.
These structures are not a substitute for a licensed guarantee where a beneficiary requires one. They are a way of managing the funding of retained risk around it, and they warrant their own analysis.
Read the alternative risk transfer guide →
What an applicant is normally asked to provide
Because a guarantee is a credit decision, the information requested is financial rather than physical. An underwriter will usually want to understand the business behind the obligation before deciding whether to stand behind it.
The list below is indicative rather than prescriptive. What is actually required depends on the insurer, the class of guarantee, the amount, the term and the standing of the applicant.
Information commonly requested when a guarantee is considered
- Audited or reviewed annual financial statements, usually for the most recent two to three years
- Recent management accounts, and an up to date debtors and creditors age analysis
- The contract, tender document, licence application or statutory requirement that creates the need for security
- The wording of the guarantee the beneficiary requires, so that the demand mechanics can be assessed
- A track record of comparable completed obligations, including references where available
- Details of the management team and their experience in the relevant activity
- The counter-indemnity and any supporting security, which may include suretyships from directors or a holding company
- Existing bank facilities, and details of any security already granted over the business or its assets
The counter-indemnity is the part applicants underestimate
A guarantee is not a transfer of the underlying obligation. If the guarantor pays the beneficiary, it will normally look to recover that payment from the applicant under a counter-indemnity, and that counter-indemnity is frequently supported by personal or group suretyships.
The commercial benefit of a guarantee is therefore liquidity and access, not the removal of responsibility. The obligation still has to be performed, and the consequences of failing to perform it still land on the business and, depending on what was signed, on the people behind it. That is the point at which the arrangement should be reviewed with care rather than treated as a formality.
Related insurance solutions
Security for an obligation sits alongside, and does not replace, the conventional insurance programme. A contractor providing a construction guarantee still needs to consider public liability, contract works and the business policy. A fuel retailer providing a credit guarantee still needs to consider the forecourt, the tanks and the shop.
Read the business and corporate insurance guide →
COMMON QUESTIONS
Guarantees and surety questions, answered clearly.
What is a guarantee in the insurance sense?
It is an undertaking by a licensed insurer to pay a beneficiary if a defined obligation is not met. Guarantee is a named class of non-life insurance business under the Insurance Act 18 of 2017, covering loss resulting from insolvency, from the failure of a person to discharge an obligation, and from suretyship offered as part of normal business activities.
How is a guarantee different from a bank guarantee?
The statutory class expressly excludes a guarantee issued by a bank registered under the Banks Act, 1990. In practice a bank guarantee is usually drawn against the client's facility and secured accordingly, while an insurer-issued guarantee is a separate underwriting decision that does not of itself consume the bank facility.
Is a guarantee the same as insurance for my business?
No. A conventional policy indemnifies the insured for its own loss. A guarantee protects a third party, the beneficiary, against the failure of the applicant to perform. If the guarantor pays, it will normally seek to recover that payment from the applicant under a counter-indemnity.
What is the difference between a demand guarantee and a suretyship?
A demand guarantee creates an obligation independent of the underlying contract, so a compliant demand triggers payment and the narrow exception is fraud by the beneficiary. An accessory suretyship is tied to the underlying contract. The heading on the document does not decide the question; the courts look at the terms of the instrument itself.
Can a guarantor refuse to pay because there is a dispute on the contract?
Where the instrument is a properly drawn demand guarantee, the Supreme Court of Appeal has held that liability is independent of disputes under the underlying agreement and that the guarantee must be honoured save where the claim is tainted by fraud. Where the instrument is in truth an accessory obligation, the position differs. The wording governs.
Does the beneficiary have to follow a particular process to call on a guarantee?
The demand must comply with the terms of the guarantee. In one matter a demand failed because the guarantee required a court order of liquidation to be attached and none was attached. Reading the demand mechanics before relying on the security is part of assessing whether the security is worth what it appears to be worth.
Does a guarantee use up my bank facility?
An insurer-issued guarantee is not drawn against the bank facility in the way a bank guarantee normally is, which is the usual reason a business approaches the guarantee market. Existing facilities and any security already granted are still relevant to the underwriting decision.
What security will the guarantor want from me?
Almost always a counter-indemnity, giving the guarantor recourse against the applicant if it pays out. That is frequently supported by suretyships from directors or a holding company, and sometimes by collateral. The extent depends on the amount, the class and the financial standing of the applicant.
How long does a guarantee stay in place?
It depends on the instrument. Some expire on a fixed date, some run until a defined event such as practical completion or the issue of a closure certificate, and some reduce automatically as milestones are met. Formal release matters, because an instrument that is not released can continue to occupy capacity.
Can guarantee facilities be reviewed?
Yes. A review can compare the guarantees currently in issue, the wordings accepted, the counter-indemnity given, the security provided and the cost, against the contracts, licences and appointments that actually require security.
