A Bond provides a purchaser the security of a guarantee security if there is a failure to meet contractual obligations. It is a commitment/substitution/ addition given by another party called a guarantor (in this case the insurance company) that has a more assured financial position and who is not usually party to the performance of an agreement/contract. The recipient of the guarantee is normally called the beneficiary. The purpose of a bond or financial guarantee is to compensate the third party (beneficiary) in respect of loss suffered as a result of the failure of the insured to perform a task set out in the insurance contract.
Upon providing such a bond as requested, the insurer acts as the guarantor, and is bound to pay a defined amount of money should the insured person fail to meet the terms and conditions of the contract with the third party.
There are several types of bonds:
Performance bonds are used when a contractor needs assurance of financial capability to complete contracted work as per agreed terms.
Bid or tender bonds are used when the cost of new tendering has to be incurred in case a successful bidder does not take up an offer.
Immigration or security bonds are issued to non-Kenyans whose conduct the insurer guarantees. In case the insured displays poor conduct, the insurance company is obligated to pay the costs of deportation or the consequences of her or his bad conduct. Kenyans living in foreign countries are also required to secure such bonds upon travel.
Customs and imports bonds ensure that goods which are pending payment of duties are not smuggled into the local market without payment. Should the untaxed goods end up in the market; the insurer will meet the duty payable by the insured. Customs bonds are given for goods in transit through the country or those produced in duty free zones targeting the export markets. Import bonds are given to cover duty for goods imported into the country.
Secures the third party against non-performance or under-performance of the insured according to the terms of the agreement.