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How to Calculate Work-In-Process

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Work-in-process, or WIP, is an account on the balance sheet where all the costs referring to a product or asset in production are recorded. It covers costs related to direct labor, direct materials, and MOH (applied manufacturing overhead). The “WIP” account is debited (increased) by direct materials used in production, direct labor involved in production, and by the amount calculated for MOH. When an asset goes through all the stages of the production process, it becomes a finished good that can be sold. When this happens, the amount associated with the respective product is credited to “WIP” and debited to “finished goods”. Needless to say, any errors in calculating WIP will mess up the entire balance sheet, so it is important to pay attention to every step and number in the calculation process. The following steps should ensure an accurate WIP calculation. How to Calculate WIP in 5 Steps 1. Find out the direct materials amount issued for production within the reported period. It is recorded as a debit to “WIP” and credit to “direct materials”. To calculate used direct materials, take the initial direct materials balance, add material purchases, and subtract the resulting balance in “direct materials”. 2. Find out the direct labor amount involved in the production process within the reported period. It is recorded as a debit to “WIP” and as a credit to “salaries/wages payable”. The salary/wage expenses related to the production within the reported period represent the direct labor amount. 3. Calculate the MOH amount for the reported period. It is an estimate used for calculating WIP. A cost driver is used to apply MOH. To calculate the overhead rate, take the overhead costs budgeted, and divide them by the estimated cost driver (e.g. machine or labor). Multiply the resulted overhead rate by the cost driver referring to actual production units. You will obtain the MOH amount that needs to be debited to “WIP” and credited to “overhead”. 4. Debit the MOH amount obtained at the previous step to the “WIP” account. The actual MOH costs cover indirect materials and labor, as well as other costs indirectly related to the production process. These are debited directly to “MOH”. In theory, the applied MOH credit will match the actual costs debited, and the amounts corresponding to applied and actual overhead will be the same. If a debit balance remains after you debit actual costs to “MOH”, it means overhead was under-applied. A remaining credit balance suggests that you over-applied the overhead. Adjustments become necessary when the amount corresponding to over/under-applied MOH has a material impact on the WIP balance and will impact further use of the information as well. 5. Calculate the ending balance in the WIP report on the balance sheet. Add the initial WIP balance to the amounts obtained at the first three steps. Subtract the finished goods inventory (debited to “finished goods” and credited to “WIP”). The result should be the final balance of the WIP account, and it should coincide with the reported amount on the balance sheet. http://cabbage.upwith.net/blog/58ab134abe6f810004dc02be

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A.M. Best Affirms Credit Ratings of Accredited Surety and Casualty Company, Inc.

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OLDWICK, N.J.–(BUSINESS WIRE)–A.M. Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” of Accredited Surety and Casualty Company, Inc. (Accredited) (Orlando, FL). The outlook of these Credit Ratings (ratings) is stable. Accredited is wholly owned by Randall & Quilter Investment Holdings Ltd. (R&Q) (AIM:RQIH). R&Q owns non-life insurance portfolios in runoff, services companies active in insurance and insurance entities that are open for live business. The ratings reflect Accredited’s solid risk-adjusted capitalization level, positive operating earnings and niche market position within the bail bond industry. Since 2011, Accredited has generated increasing underwriting profits due to its low bail bond loss experience. Offsetting the positive rating factors is Accredited’s current product concentration, which exposes the company to changes in regulation related to bail bonds, high expense structure and the execution risk associated with its business expansion plan. Although management plans to expand Accredited’s writings into specialty property/casualty lines to broaden its offerings, the majority of business currently remains in the surety sector. The stable outlooks reflect A.M. Best’s expectation that operating results will continue to be profitable, and that Accredited’s risk-adjusted capitalization level will remain supportive as planned growth and diversification of product offerings begins to occur http://www.businesswire.com/news/home/20170216005703/en/A.M.-Affirms-Credit-Ratings-Accredited-Surety-Casualty

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Understanding Your Surety’s Indemnity Agreement

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Contractors on public and private projects are often required to obtain surety bonds to secure their bidding, payment, and performance obligations under a construction contract.[1] A bond is a three-party contract entered into by the surety, the principal (contractor) and the obligee (owner) in which the surety guarantees to the obligee that the principal will perform certain obligations under the contract between the obligee and the principal. For example, a surety on a performance bond guarantees the owner that the contractor will complete the project; and a surety on a payment bond guarantees the owner that the contractor will pay all intended claimants under the bond.[2] Most surety companies are subsidiaries or divisions of insurance companies and both surety bonds and insurance policies are regulated by state insurance departments. However, a surety bond is not an insurance policy. One major difference between insurance policies and bonds is that sureties do not expect to incur a loss under the bonds they issue. Before agreeing to bond a contractor, sureties typically require those with a financial interest in the contractor to sign a General Agreement of Indemnity (“GAI”). The GAI provides the surety with a means to be reimbursed in the event that it incurs costs and losses under the bonds it issues to the contractor. But is the surety’s right to be reimbursed under the GAI absolute? No, but the case of Cagle Construction, LLC v. The Travelers Indemnity Co.[3] illustrates why contractors should understand the scope and application of their GAIs when a claim is made on a bond. In this case, Cagle Construction, a general contractor, contracted with the Georgia Department of Defense (“GDoD”) to perform work on four separate projects. Cagle Construction and its members (collectively “Cagle”) executed a GAI in favor of the surety, which provided, in part, that “[Cagle] will indemnify and save Surety harmless from and against every claim, demand, liability, cost, charge, suit, judgment and expense which the Company may pay or incur in consequence of having executed, or procured the execution of, such bonds, . . . including fees of attorneys, . . . and the expense . . . in bringing suit to enforce the obligation of any of the Indemnitors under this Agreement. In the event of payment by [the surety], [Cagle] agree[s] to accept the voucher or other evidence of such payment as prima facie evidence of the propriety thereof, and of [Cagle’s] liability therefor to Surety.” “[i]n the event of any breach, delay or default asserted by [GDoD] in any said Bonds, or [Cagle Construction] is suspended or ceased work on any contract or contracts covered by any said Bonds, . . . Surety shall have the right, at its option and in its sole discretion, and is hereby authorized . . . to take possession of any part or all of the work under any contract or contracts covered by any said Bonds, and at the expense of [Cagle] to complete or arrange for the completion of the same, and [Cagle Construction] and [Cagle] shall promptly upon demand pay to Surety all losses, and expenses so incurred.” Before completion of the projects, the GDoD dismissed Cagle Construction and made demand on the surety to complete each of the four bonded projects, which it did, paying more than $700,000 above the unpaid balance of the contracts to do so. After completion of the projects, the surety sought reimbursement for the cost overrun from Cagle. Cagle refused to pay. The surety then sued Cagle seeking reimbursement under the terms of the GAI. Cagle did not believe the surety was entitled to reimbursement for at least three reasons. First, Cagle argued that Cagle Construction was never in default of the GDoD construction agreement. Second, Cagle argued that the amount paid by the surety to complete the work was unreasonable. Third, Cagle argued that the surety did not bring its lawsuit within the 1-year time period from substantial completion required for a claim on a public works payment bond under Georgia law. Cagle Construction admitted that it was “ordered off the premises,” but it denied that it was in default on any of the contracts. The Court held that that Cagle was obligated to reimburse the surety because the indemnity obligation under the GAI was triggered by the GDoD’s assertion that Cagle Construction was in default, irrespective of whether Cagle Construction was truly in default.[4] The Court also rejected Cagle’s position that the surety paid too much to complete the work because the GAI provided that “[i]n the event of payment by Surety, [Cagle] agree[s] to accept the voucher or other evidence of such payment as prima facie evidence of the propriety thereof, and of [Cagle’s] liability therefor to [Gulf].” The Court held that the surety’s summary of expenses was sufficient to establish a right of indemnification, unless Cagle could show either bad faith by the surety or direct evidence that the surety did not in fact incur the expenses, even if the work could have been completed at a lower cost. Cagle’s final contention was that the surety’s indemnification claim was barred by the one-year statute of limitation for claims on a public works payment bond under Georgia’s “Little Miller Act,” O.C.G.A. § 13-10-65. The Court found that the surety’s suit was brought under the terms of the GAI, which the parties entered into separate from the surety bonds on the four contracts, making the statute of limitations for a Little Miller Act claim inapplicable. Thus, the surety’s claim for indemnification under the GAI was a claim on a contract, not a claim on a payment bond. Normally a claim on a written contract that is not for the sale of goods, like the GAI, would have a six (6) year statute of limitations in Georgia.[5] But in this case, the GAI was signed “under seal” because it included a recitation in the body and above the signature lines that stated “the [i]ndemnitors have hereunto set their hands and affixed

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Lawsuit Filed Against University Estates

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Once again, the University Estates development in northwest Athens is the subject of litigation, with a bonding company called Developers Surety & Indemnity filing a complaint against UE and its former developer Dr. Richard Conard, along with secretary Elizabeth Conard. During Conard’s time developing University Estates, the allotment off Ohio Rt. 682 and Armitage Road was the subject of multiple lawsuits either filed by Conard or against him. In 2009, Conard, who lives in Palmetto, Florida, filed suit against the city of Athens after officials signed a memorandum of understanding with another developer that had agreed to purchase a mortgage note on more than 600 acres of UE’s mixed-use development site. Eventually, that lawsuit was dismissed without prejudice in U.S. District Court. In 2010, Citizens Bank of Logan acquired the property after the bank said a default had occurred. In early 2014, H2 Development LLC, which is co-owned by local businessman Brent Hayes, purchased 566 acres of land that had not been platted for homes from Citizens Independent Bankcorp Inc. for slightly over $1.1 million. On Jan. 6, Developers Surety & Indemnity Co., of Irvine, California, filed its lawsuit against the Conards in Athens County Common Pleas Court, seeking $55,943. This amount, according to the lawsuit, was paid to the city of Athens as settlement of a claim the city made on the bond. The city did this in an effort to complete streets within the development. That work was completed in 2013 after a struggle with road issues since the land was annexed into the city in 2000. Athens had refused to accept the UE roads into the city until all of the roadways were completed to meet city standards. Eventually, an agreement was struck to assess UE property owners to pay for the road-improvement project, which cost $715,700. In addition to the $55,943 bond settlement, Developers Surety claims in the lawsuit that they have incurred “costs, expenses and attorneys fees” in the past and will continue to do so, requesting the court to award both the settlement and the other costs, as well as any other relief deemed just and appropriate. As of Friday, Conard had not filed an answer to the complaint. http://www.athensnews.com/news/local/lawsuit-filed-against-university-estates/article_85ce1780-db50-11e6-a898-cf62482b3c6a.html

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Evansville Company’s Bankruptcy Stalls Progress On Several Major Construction Projects

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EVANSVILLE, IN (WFIE) – Court documents show Peyronnin Construction filed for Chapter 7 bankruptcy on Monday. That means several multi-million dollar construction projects are in the lurch, including the McLean County Regional Water Treatment Plant, the International Blue Grass Museum, Owensboro Community and Technical College, and a gravity-fed sewer line in Mt. Vernon. Owensboro Community and Technical College – $12-million contract International Bluegrass Museum – $9.6-million contract McLean County water treatment plant – $8.5-million contract Mt. Vernon gravity-fed sewer line – $860,000 contract Owensboro city attorney Ed Ray says as of Tuesday morning construction on the museum was shut down and the project will be turned over to the surety company, The Great American Insurance Company. He says they will be responsible for finding a “new contractor at the contractor price.” Ray says the city gets a lot of pushback over using performance bonds for projects like this, but he says this is the perfect example of why they exist. The bond is like an insurance policy and it means Owensboro won’t be out any money now that the contractor hired to do the project has folded. Museum Project Director Ted Lolly says the news came as a “total surprise” because the company has been in business for at least 70 years. Lolly says construction of the museum is only 20 percent done, but he says the city has a surety bond for this type of situation. He says while Peyronnin’s bankruptcy will ultimately slow construction, the city will be okay financially. McLean County Judge Executive Kelly Thurman says the water plant project engineer called him Tuesday morning and told him about the bankruptcy filing. He says he was shocked by the news. Work on the plant has come to a halt and Judge Thurman expects crews to pack up and leave in the next few days. The bankruptcy isn’t going to impact the project getting done or add any extra cost because the county has a performance bond in place. A new contractor will be selected to finish the work. Judge Thurman says the water plant is almost finished. It was supposed to be completed this spring, but with the bankruptcy filing, Thurman expects the plant to be up and running this fall. http://m.wave3.com/wave/pm_/contentdetail.htm?contentguid=od:hdBWupfS

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Markel to Acquire SureTec Financial Corp

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RICHMOND, Va. and HOUSTON, Feb. 1, 2017 /PRNewswire/ — Markel Corporation (“Markel”) (NYSE: MKL) and SureTec Financial Corp. (“SureTec”) announced today that they have entered into a definitive agreement for Markel to acquire SureTec for approximately $250 million, inclusive of a three-year earn out. The transaction is subject to customary closing conditions, including insurance regulatory approvals, and is expected to close in the first half of 2017. Following the acquisition, SureTec will operate as a separate business unit, with John T. Knox, Jr., SureTec’s current Chairman and Chief Executive Officer, leading his seasoned team in his current capacity. The operating unit will become part of Markel’s Specialty division and US Insurance segment. Richard R. Whitt, Co-Chief Executive Officer of Markel, commented, “We are very excited to have John and the SureTec team join Markel. Since its start in 2002, SureTec has grown its surety business prudently and profitably with a diversified product and geographic mix. It has become a top 20 player in the surety market nationwide through its offerings of contract, commercial, and court bonds. As with all our acquisitions, we look forward to exploring opportunities to profitably grow the business.” John T. Knox, Jr., Chairman and Chief Executive Officer of SureTec, remarked, “We could not be happier to be joining Markel. I look forward to leading what will become Markel Surety and building upon SureTec’s success while benefiting from Markel’s financial strength and (re)insurance capabilities, which will position us to better serve our customers and grow our business.” TigerRisk Capital Markets & Advisory served as financial advisor and Sidley Austin LLP served as legal advisor to Markel. Locke Lord LLP served as legal advisor to SureTec. About Markel Corporation Markel Corporation is a diverse financial holding company serving a variety of niche markets. The Company’s principal business markets and underwrites specialty insurance products. In each of the Company’s businesses, it seeks to provide quality products and excellent customer service so that it can be a market leader. The financial goals of the Company are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. Visit Markel Corporation on the web at markelcorp.com. About SureTec Financial Corp. SureTec is one of the largest privately owned surety companies in the US. SureTec’s largest subsidiary, SureTec Insurance Company, is rated A (Excellent) by A.M. Best. In partnership with professional surety producers and independent agents, the company has offices in Atlanta, Austin, Dallas, Houston, San Antonio, San Diego, and Orange County, California. SureTec operates in 50 states and has one international affiliate. Visit SureTec on the web at suretec.com.

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Tampa Housing Authority Wishes, Fired Developer Gets Another Crack At Building Tempo Housing Project

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TAMPA — The Tampa Housing Authority thought it had seen the last of the Siltek Group when in July it fired the contractor building a signature $25.6 million The Tempo at Encore was behind schedule and had fallen prey to shoddy workmanship and poor management, said Housing Authority officials. And Siltek owner Ana Silveira-Sierra continued to let her husband, Rene Sierra, work as project manager even after he had pleaded guilty in a multi-million dollar kickback scheme involving affordable housing in South Florida. So Housing Authority officials were outraged to learn that Berkley Surety Group, the firm that underwrote the project, has hired a new company owned by Silveira-Sierra to finish the seven-story building. Officially Berkley has contracted with Tron Construction. But records show that the firm was established by Silveira-Sierra less than one month after Siltek was terminated from the Tempo project and operates out of the same Plantation office. It means that completion of the 203-unit building intended to provide affordable housing will effectively be in the hands of the same developer that the Housing Authority and its development partner, Banc of America Community Development Corp., are suing for botching construction. Housing Authority attorney Felix Rodriguez expressed frustration at Berkley’s decision in an October letter. He said the underwriting agreement gives the New Jersey firm the right to choose its own contractor. “The Housing Authority was extremely disappointed with the surety’s selection,” he said. “We can’t do anything about it without losing our rights to surety.” The letter sent to Berkley by Rodriguez put it more bluntly: “In short, the owner has no confidence in Siltek’s or Tron’s ability to complete the job.” Silveira-Sierra declined to comment on the selection of her new firm. The decision to go back to the same developer is likely about protecting the bottom line, said Jack Neu, a surety bonding specialist with Nielson, Wojtowicz, Neu & Associates. “If they brought in someone new, that entity would have to investigate everything that was put in place previously,” Neu said. Still, he expects Berkley to keep close tabs on Tron’s work. Originally scheduled to open fall 2016, Tempo is part of a 28-acre, $450 million mixed-income housing development replacing Central Park Village. It will include public housing and market-priced apartments. The development partnership opted to fire Siltek with the project about 80 percent complete, stating in a letter to the firm that it was not employing enough construction workers or complying with inspectors. Siltek had also created an adversarial relationship with its subcontractors, the letter stated. Among other problems, drywall had been installed before the building had been closed off to rain, said Housing Authority chief operating officer Leroy Moore. After Siltek was fired, some drywall had to be removed because of dampness. Housing Authority officials were also concerned that Silveira-Sierra’s husband was still involved in Tempo even after he admitted to federal investigators that he conspired with Miami developers to inflate construction costs to earn additional federal tax credits and grants through his company, Siltek Affordable Housing. Sierra was officially removed from the project, but Housing Authority emails show that he returned to Tampa to work as project manager on Tempo. In December, he was sentenced to three years of probation including six months of home detention with electronic monitoring. He was also ordered to repay $1.2 million to the government. Tempo, which was partly funded through a Choice Neighborhood Grant awarded by the U.S. Department of Housing and Urban Development, is unlikely to be finished until at least the summer, said Rodriguez, the Housing Authority attorney. But after sitting vacant for months, the construction site is now bustling with about 60 workers each day. http://www.tampabay.com/news/against-tampa-housing-authority-wishes-fired-developer-gets-another-crack/2308312

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SBA Recognizes Surety Bond Companies; Increases Bond Guarantees to 90 Percent

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Several surety bond companies that are partners with the U.S. Small Business Administration (SBA) in helping small contracting businesses with their surety bond needs were recently honored by SBA’s Office of Surety Guarantees at a ceremony held at the Agency’s headquarters in Washington, D.C. Michael Konzen, with CCI Surety Inc., was recognized as Surety Agent of the Year. Carol Nevin with Tokyo Marine HCC Company, and Kenneth Turner, Bruce Allen and Greg Allen with KOG International Inc. were also honored as Surety Partner of the Year and Surety Agency of the Year, respectively. All three firms have excelled in their participation, activity, claims and recovery as well as in their commitment to continue growing and helping small businesses obtain and perform contracts with both government entities and the private sector. SBA increased its guarantee percentage for bonds issued in the Preferred Surety Bond Program from no more than 70 percent to no more than 90 percent, per Public Law 114-92 of the National Defense Authorization Act of 2016. SBA guarantees will be 90 percent if the original contract is $100,000 or less, or if the bond is issued on behalf of a small business owned and controlled by socially or economically disadvantaged individuals, veterans, service disabled veterans, or qualified HUBZone and 8(a) businesses. In all other cases, the guarantee will be 80 percent. The increase will be effective Nov. 25, 2016. The new guarantee limits will expand bonding opportunities for many small businesses. For more information about the Surety Bonds Guarantees Program, please visit https://www.sba.gov/surety-bonds. http://www.prnewswire.com/news-releases/sba-recognizes-surety-bond-companies-increases-bond-guarantees-to-90-percent-300365404.html

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New Program To Aid Small Firms Get Government Contracts

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Stanley and Jocelyn Tucker, founders of a nearly 20-year-old landscaping company in Central Jersey, know firsthand the difficulties that minority-owned small businesses face. So they welcome a new state program that will enable firms like theirs to compete for lucrative state and federal contracts. The husband-and-wife team, partners in Job One Lawn and Landscape LLC in Ewing, are among those voicing their support for legislation signed into law earlier this month by Gov. Chris Christie that created the Small Business Bonding Readiness Assistance Program. The program, under legislation passed unanimously by both houses of the Legislature, will be administered by the New Jersey Economic Development Authority and provide support services and assistance to small companies so they can secure surety bonding, a task that has discouraged many small businesses in the past. Surety bonds, which ensure a project’s completion in the event of a contractor’s default, may not be a sexy subject. But they are important because securing them is typically required for contractors, big or small, who want to bid on government projects. The new state program aims to make that bidding process less exclusionary — and more competitive — by making more players eligible. According to the the governor, 98 percent of all the businesses in New Jersey are small businesses, with fewer than 100 workers, and they employ more than 1.7 million people. And 28 percent, or 31,395, of Bergen County’s companies, are minority owned, while 36 percent, or 16,478, of Passaic County’s are minority owned, according to 2012 U.S. Census data. Jocelyn Turner described bonding requirements as both “the gateway” and the “big wall” for small businesses to win “larger and more substantial” contracts. “You could have done a lot of the leg work to prepare yourself in many ways, and then you’ll hit that roadblock,” she said. “We are still in that same space and have not been given a surety bond or been able to bid where one is required to date. Years in the making The legislation had bipartisan support and involved several years of work and meetings between the African American Chamber of Commerce of New Jersey and state officials, including Christie, according to John Harmon, president and chief executive of the chamber. The bill also had the support of the Statewide Hispanic Chamber of Commerce of New Jersey and the New Jersey Chamber of Commerce. “You hear about public projects and then wonder, ‘Why isn’t the small-business community participating?’” Harmon said. “It’s because the law says that in order to do a public contract over $200,000, you need a bond. So this was in response to a growing need to have more of New Jersey small businesses participating in economic opportunity.” The bonding assistance program will walk small-business owners through the necessary steps to obtain a surety bond, he said. “The bonding is a strong vetting process,” Harmon said. “They sit down with you and want to know your history of work done and completed. How many jobs have you done over the last year? What was the size of those jobs? Did you complete those jobs? How good is your record-keeping, your financial management? How good is your understanding of estimating and contract law? What we proposed is the state of New Jersey start a program that will take small businesses, contractors, through this process and then introduce them to sureties so they will be bonded.” Under the new law, the EDA will also create a $250,000 fund to award grants to small businesses that participate in the program. Governor’s support When Christie signed the bill at a ceremony at the chamber’s headquarters in Trenton, he called the new program “another avenue for small, minority-owned and women-owned businesses to have greater access to job creating opportunities.” The governor added, “Increased competition for public contracts will lead to lower costs and a more diverse pool of small businesses performing public services.” The Tuckers are likely to avail themselves of the program, and they have turned to the EDA for assistance in the past. “Legislation like this is meaningful because when you think of a situation where the majority of a minority group or minority groups face the same consistent obstacles historically over time, then there needs to be this kind of a door opener,” Jocelyn Tucker said. “And that’s what I equate this legislation to.” Her husband, Stanley Tucker, added, “A program like this would just help us get over the top.” Carlos Medina, chairman of the state’s Hispanic Chamber of Commerce, said that his group has members, “mostly in the construction industry — painters, Sheetrock guys, carpeting guys, flooring guys — where the surety bond becomes an issue.” The process can be onerous because “you have to have a certain amount of sales, it’s paperwork, it’s a combination of things,” according to Medina. The new EDA program “definitely eliminates one of the hurdles” for small firms to land government contracts, he said. Sponsor speaks up The lawmakers who sponsored the bill, including Assemblyman Jamel Holley, D-Union, said it was in response to feedback from minority-owned small businesses, adding that they will now be able to tap into the fund created by the new program. Tom Bracken, president and chief executive of the New Jersey Chamber of Commerce, said he has witnessed the problems small companies have getting surety bonds. “When I was in the banking business, if a small business went to a bonding company to try to get a bond, it was pretty much a quick conversation because they couldn’t qualify,” he said. “So, the new program is a way to open up new avenues of potential revenue for small business.” http://www.northjersey.com/story/money/small-business/2017/01/24/new-program-aid-small-firms-get-government-contracts/96724648/

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Does The Accessory Principle Apply To Surety Bonds?

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China’s surety bond market underwent significant development in 2016 and surety bonds have become one of the most important methods for securing a financial guarantee. However, due to a lack of clear Supreme Court guidance on the matter, the laws that apply to surety bonds issued by insurers in China are still the subject of much debate. This update addresses whether the Guarantee Law’s accessory principle applies to surety bonds issued by insurers in China. Governing laws for interpreting surety bonds A ‘surety bond’ is a written agreement that usually provides for monetary compensation to be paid to the obligee if the principal fails to perform acts as promised. In China, surety bonds can be issued by banks (ie, bank guarantees) and insurers (ie, guarantee insurance). One difference between the two is that bank guarantees are drawn from a company’s credit lines on the bank’s terms, whereas, if an insurer issues a bond to guarantee performance, payments are made in the form of a premium and are not drawn from the company’s credit lines. One of two Chinese laws could apply to the issuance of surety bonds, depending on whether the surety is regarded as: a security instrument governed by the Guarantee Law, which came into force in October 1995; or an insurance product governed by the Insurance Law, the most recent amendment to which came into force in April 2015. Suretyship, guarantee contracts and guarantee insurance Article 6 of the Guarantee Law defines ‘suretyship’ as an agreement between a surety and an obligee that the surety will perform the obligation or bear liability according to the agreement if the obligor fails to perform its obligations to the obligee. Article 5 of the law provides that a ‘guarantee contract’ is “an accessory contract to the principal contract. If the principal contract is null and void, the guarantee contract shall be null and void accordingly. Where it is otherwise agreed in the guarantee contract, such agreement shall prevail.”(1) Under the Guarantee Law, a guarantee contract is an agreement between an obligee and a surety that is different, and yet ancillary, to the principal contract between the obligee and the obligor. The establishment, amendment and termination of a guarantee contract is premised on the principal contract. Where the principal contract is null and void, the guarantee contract shall also be null and void, unless otherwise agreed by the parties or stipulated by law. Conversely, ‘guarantee insurance’ is a type of insurance policy that can be issued only by insurers. Even though guarantee insurance is regarded as being within the scope of ‘property insurance’ under Article 95 of the Insurance Law,(2) Chinese law provides no standardised legal definition of guarantee insurance. The Supreme Court’s decision in a guarantee insurance dispute between two financial institutions held that ‘guarantee insurance’ is a type of insurance through which the insurer provides a guarantee to the insured (obligee) on behalf of the policyholder (obligor), in case the policyholder cannot perform its obligations as agreed in the contract with the insured and causes the insured to suffer an economic loss. In such cases, the insurer will bear the liability to compensate the insured in accordance with the agreement between the insurer and the policyholder. The Supreme Court further held that, even though guarantee insurance is a type of insurance, it is, in effect, a type of suretyship provided by the insurer to the insured. In the China Insurance Regulatory Commission’s (CIRC) decision in the same case, it stated that “guarantee insurance is a type of property insurance”. This classification was later adopted by the Insurance Law. Differing views Although the Supreme Court and the CIRC have each provided definitions, disparity remains among law practitioners and scholars regarding the nature of guarantee insurance. Article 36 of the Draft Interpretations of the Supreme Court on Issues in Trying Insurance Disputes provides that the courts “shall apply the Contract Law and the Insurance Law to ascertain the legal relationship between the parties when trying guarantee insurance contract disputes; the Guarantee Law shall be referenced where the Contract Law and the Insurance Law do not stipulate”. Article 34 of the draft interpretations provides that “guarantee insurance contracts serve to guarantee the performance of the contractual obligations, which has the nature of suretyship”. Article 38 of the draft interpretations provides that: “Guarantee insurance contracts shall be null and void where the principal contract is null and void, and the insurer is not to be held responsible for the insured liability. However, if the insurer knows the principal contract is void and still agrees to issue the guarantee insurance, the insurer shall assume the liability of compensation.” Although the interpretations have yet to come into force and the extent of the official version is unknown, the draft interpretations have substantially influenced the views of some local courts regarding: the nature of guarantee insurance contracts; and the legal relationship between a guarantee insurance contract and its so-called ‘underlying contract’. Specifically, the courts have applied the Guarantee Law in some guarantee insurance cases, holding that: a guarantee insurance contract is an ‘accessory contract’ to the underlying contract; and that guarantee insurance contracts are null and void where the underlying contract is null and void. However, some courts have maintained the opposite view that: a guarantee insurance contract is independent from the principal contract; and its validity does not depend on the principal contract. The ultimate reason behind this disparity is the absence of legislation and legally binding guidance in the guarantee insurance field. Are guarantee insurance contracts insurance contracts? Notwithstanding the above disparity, a guarantee insurance contract should arguably be regarded as an insurance contract governed by the Insurance Law, rather than a guarantee contract governed by the Guarantee Law. The reasons for this view, which is held by the majority of law practitioners and scholars in China, are as follows: The parties to a guarantee insurance contract are the insurer (surety) and the policyholder (obligor). The obligee to the principal contract, which is normally

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