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The origins of the guarantee insurance system can be traced back to the mid-18th century when there were numerous disputes in courts in England, which caused the public to lose confidence in personal guarantees. In 1840, Professor De Morgan from the University of London proposed the theoretical foundation and business model for guarantees. That same year saw the emergence of two guarantee companies: the Guarantee Society of London, which was the first company specializing in honest guarantees, and the British Guarantee of Trust Company.
In 1865, the Fidelity Insurance Company was established in the United States, and its operations were also limited to honest guarantees. In 1884, the American Surety Co. was founded, the world’s first company engaged in the surety business. In 1894, the US Congress passed a bill allowing guarantee companies to guarantee federal officials and requiring guarantees for government construction contracts, prompting the establishment of various guarantee companies. Until the early 20th century, intense competition among companies led to bankruptcies as they competed to reduce rates. To respond to this situation, some American guarantee companies formed the Surety Association of America in 1908 to rationalize rates and establish a sound legal system for guarantees.
The Old Yokohama Fire and Marine Insurance Company, based on the American concept of “honesty guarantee,” launched a new type of insurance called “credit insurance.” However, the company’s main business targets were foreign companies with business premises in Yokohama due to the widespread use of Japan’s unique “identity guarantee system,” which hindered the development of the insurance. “Credit Insurance” was not going far until the “Identity Guarantee Law” was enacted in 1933, when the insurance began to have the potential for development. In 1949, to promote the development of the construction industry, Japan established the “Construction Industry Advisory Committee” under the “Construction Industry Law.” The committee adopted the guarantee system implemented in England and the United States to rationalize the bidding system for construction projects. Later, in 1951, when the Insurance Business Law was revised, the first item of the first paragraph under the “Insurance Business” item was annotated to include “filling in the loss that may be caused to the creditor by the debtor’s failure to perform the debt arising from a purchase, employment, contract, or other agreement with the debtor receiving compensation.” Thus, this business was explicitly included in the insurance business, providing a legal basis for guarantee insurance.
The “Property Insurance Contract Regulations of the People’s Republic of China,” promulgated by the State Council on September 1, 1983, directly stipulates two types of insurance: guarantee insurance and credit insurance. The “Insurance Law of the People’s Republic of China” uses the broad concept of credit insurance to include both types of insurance.
The Development of Guarantee Insurance in Taiwan
Guarantee insurance first appeared in Taiwan in 1953, when the Kuomintang government authorized the establishment of the Taiwan Guarantee Corporation to promote national economic development. Since then, several domestic guarantee companies have been established, widely used in various industries.
Evolution of Taiwan’s Surety Insurance
There was no provision for surety insurance in Taiwan’s insurance law before. However, insurance practice had already seen the emergence of “employee credit surety insurance” in May 1964, the earliest product related to surety insurance in Taiwan. In 1969, Taiwan Fire & Marine Insurance Co. Ltd. and Central Insurance Co. Ltd. applied to the Ministry of Finance for approval to attach performance surety insurance to installation engineering comprehensive insurance to cover the performance guarantee insurance of Canadian companies in the construction of the “National Chung-Shan Institute of Science & Technology Nuclear Reactor Project”. In 1972, Chung-Kuo Insurance Company was approved by the Ministry of Finance to offer “bid deposit guarantee insurance”, which was designed for the Central Trust of China(later merged into Bank of Taiwan) bidding business and was not entirely applicable to general construction practices. In 1973, the property insurance industry applied to the Ministry of Finance for approval to attach performance surety insurance to the engineering insurance they provided through endorsement. This stage was still in a trial phase, and the insurance companies did not establish policy terms and underwriting methods separately at the time. In July 1986, “engineering retention fund surety insurance”, “engineering performance surety insurance,” “engineering advance payment surety insurance”, “engineering bid deposit surety insurance”, “engineering payment surety insurance”, and “engineering warranty surety insurance,” six types of surety insurance products related to construction and repair projects, emerged in response to the needs of engineering practices.
Evolution of Insurance Laws
On February 26, 1992, Taiwan’s insurance law was amended to include a section on “surety insurance.” From the explanatory notes of the amendment, it can be inferred that the legislative purpose of this section was to reflect the fact that “surety insurance has been adopted for a long time in advanced European and American countries and is one of the important types of insurance. Surety insurance is not the same as property insurance and requires specific provisions in this law.” In recent years, the Taiwanese government has actively promoted the engineering surety system to strengthen construction and repair management. The number of industrial insurance policies covering honest credit surety insurance has increased yearly. Therefore, surety insurance has been specifically defined in this law for application. From the above content, it is apparent that the provisions of the “surety insurance” section were added based on the needs of insurance practices.
Reasons for Establishing Surety Bonds
The reasons for establishing surety bonds include the following:
(1) Effective use of funds
In cases where a bidder is required to provide a large sum of cash deposits as a guarantee for a construction contract or supply of goods, a significant amount of funds will be immobilized and cannot be effectively utilized. Using a surety bond instead, the bidder only needs to pay a small premium.
(2) Prior selection of risks
When entering into an insurance contract, the insurer will inevitably select risks and conduct necessary investigations on credit and moral character of the party being insured. As a result, the principal can obtain bids from bidders with good credit or moral character through the signing of an insurance contract.
(3) Prevention of improper behavior by debtors
When the insurer incurs liability for damages, it will conduct a thorough investigation of the bidder being insured and take various measures to seek compensation. This helps to prevent the debtor from engaging in improper or negligent behavior. For more information, please refer to the section on surety bonds in the Taiwan “Insurance Law Amendment Bill” explained in the Insurance Regulations Compilation (Volume II) published by the Insurance Industry Development Center.
(4) Prevention of improper behavior by creditors
The insurer also monitors the business methods and management of the creditor (the insured) to prevent improper behavior, such as accepting bribes, by its internal personnel.
(5) The balancing role of the insurer
In construction surety bonds, the insurer’s professional knowledge allows for more objective and fair assessments of disputes between the principal and the contractor, thereby creating a balance of power between the principal and the contractor and preventing the contractor from being exploited by the principal.