FAQ – Security Deposit Insurance
FAQ - Security Deposit Insurance:Sureties/Guarantees
Here you’ll find answers to the most important questions.
1. General Information / Definition
What is rental deposit insurance?
It often happens that clients require collateral for your contract. Since it is becoming increasingly difficult for companies to obtain credit lines from their primary bank due to the strict lending guidelines under Basel II, surety insurance is an important tool for reducing the strain on your credit line with your primary bank and creating additional liquidity. Bond insurance offers you the option to draw on various types of guarantees.
How does rental deposit insurance work?
The insurer first sets a guarantee limit, which is made available to you in exchange for your company’s premium payment. Within this limit, the insured party can apply for guarantees. Upon final invoicing, the warranty bond is transferred and the full invoice amount is remitted to you.
What are the benefits of rental deposit insurance?
- Increasing the Company’s Liquidity
- Reduction in the collateral to be posted
- Reducing the utilization of credit lines at your primary bank
- Cost savings compared to a bank guarantee
- Security and Financial Stability
- Expansion of existing lines
How and when are the various types of guarantees used?
- Bidding Phase -> Bid Bond
- Construction Phase -> Advance Payment Bond / Performance Bond / Construction Trades Security Bond
- Construction Phase/Warranty Period -> Contract Performance Bond
- Warranty Period -> Warranty Guarantee
- Signing a Lease Agreement -> Security Deposit
- Claims by the Main Customs Office -> Customs Guarantees
For which companies is bond insurance suitable?
Bond insurance is particularly well-suited for businesses in the primary and ancillary construction sectors, as these industries frequently rely on surety bonds and performance bonds. Accordingly, surety insurance is essential for, for example, construction companies, steel and metal fabrication, skilled trades, gardening and landscaping, as well as machinery and plant engineering (including measurement and control technology, energy technology, process engineering, and production engineering).
What requirements must my company meet to obtain bond insurance?
In general, the requirements for companies are fairly straightforward. First, the business owner must have full legal capacity. The company’s registered office must also be located in Germany (including a German legal form). In addition, depending on the amount of the guarantee limit, the surety insurer may reserve the right to conduct a credit check based on credit bureau reports, business analyses, or financial statements.
2. Costs
How much does rent deposit insurance cost?
There is no one-size-fits-all answer to the question of how much surety insurance costs, as the cost depends on many factors (e.g., type of surety, surety limit, company creditworthiness, etc.). Surety limits starting at 5,000 EUR begin at around 49 EUR per year. Of course, significantly higher guarantee lines are also possible. Guarantee lines based on limit-based billing are also common.
3. Terms of the Contract
What are the different types of guarantees available under a security deposit insurance policy?
By default, the following types of guarantees—warranty of quality guarantee, performance bond, advance payment guarantee, and bid bond—can be accessed within a surety bond policy. In addition, however, special guarantees with specific guarantee wording can also be created. The various standard types of guarantees are explained in more detail below.
What is a warranty bond?
The warranty bond ensures that defects will be remedied for the client—even after the project has been accepted. Without this bond, however, clients reserve the right to withhold, for example, 5% of the contract value as security. If the warranty period for the contract expires without any defects, the warranty bonds are returned upon expiration of the period.
What is a performance bond?
The performance bond protects the client in the event of the contractor’s insolvency and ensures that the construction phase proceeds smoothly. In the construction industry, the performance bond typically amounts to 10%. It begins when the contract is awarded and ends upon completion or acceptance of the project.
What is a down payment guarantee?
An advance payment guarantee secures advance payments made by a client and is used particularly in the mechanical engineering industry. Clients use it to effectively protect themselves against the potential loss of an advance payment should the contractor become insolvent during the performance of the contract.
What is a bid bond?
The bid bond guarantees the terms of the bid in public procurement for the duration of the bidding process and ensures their stability. Therefore, it is automatically required of contractors when they submit bids to public procuring entities, specifying the terms of performance.
What is a customs bond?
A customs bond serves to secure revolving customs or tax obligations owed to the customs authority. It is required in particular by freight forwarders, importers, and exporters, and is generally set at 30–100 percent of the reference amount determined by customs.
What is commercial rental deposit insurance/a rental guarantee?
A commercial rental security deposit guarantee is a type of commercial security deposit insurance that applies when a business owner needs guarantees, security deposits, or other forms of collateral for a rental property. Consequently, no financial security in the form of a monetary amount needs to be deposited with the landlord: In the event of a claim, the insurer acts as the guarantor.
How long does a security deposit insurance policy last, and is there a minimum contract term?
- Unless otherwise agreed in the contract, the term of a security deposit insurance policy is one year.
- If any insurance claims remain outstanding at the time of termination, the surety insurance contract will be settled. In this case, premiums must continue to be paid until all of the insurer’s claims have been settled.
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Do you have any other questions?
Please feel free to contact us!
If you have any further questions about rental deposit insurance, please feel free to contact us.
