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Legal nature The legal nature of "guaranty insurance" remains an issue of debate in Colombia: some consider it falls within the sphere of bonds, whereas others consider it should be classified as property insurance. However, under the law it is deemed an insurance policy, and is therefore subject to the provisions of the Commercial Code. Notwithstanding the above, some of the provisions of the Commercial Code are not applicable to performance insurance, basically due to the way in which it is structured. Thus, since it is a policy in which the "Policyholder" is different from the "Insured", some of the obligations that according to the law fall on the "Insured", and whose non-fulfillment entails sanctions or negative legal consequences for said party, do not apply to it. Neither are other characteristic features of surety bonds applicable, as is the case of the "benefit of discussion or excussio" that involves the exhausting of every remedy against a principal debtor before proceeding against a surety. Performance policies cover the property damages arising out of non-fulfillment. In other words, they are essentially designed to provide indemnification. It is important to note that the guarantees required under Colombian laws are conditional: the insured must prove the occurrence and amount of the loss before making a call on the guarantee. However, some institutions require the issuance of on-demand guarantees, particularly when contracts financed by the World Bank and the InterAmerican Development Bank are involved, in which case bank guarantees are normally furnished. The market The surety market in Colombia comprises 21 insurance companies, five of which account for 76% of total premiums. There are two companies that specialize in performance insurance (which is the technical name given to insurance policies that are commonly known as "surety bonds"). In Colombia, insurance companies are controlled by the Superintendencia Bancaria (Superintendence of Banking Institutions), and have formed a trade association known as FASECOLDA (Federation of Colombian Insurers) (www.fasecolda.com). FASECOLDA's Performance Insurance Technical Committee, composed of leading insurers in the field of surety bonds, operates as a forum for discussing and defining sectoral positions in reply to requirements and problems arising in the market in connection with these lines of business. The following graph shows the development of total issued premiums in the field of performance guarantees: Performance insurance premiums *
* Data include judicial
bonds and rent insurance premiums. It is important to note that the significant increase (36,2%) shown by premiums in dollars terms between 2003 and 2004 was a result of the revaluation of the peso against the dollar. Growth in pesos amounted to 22%. The following graph shows the market share of the main insurance companies based on 2004 premium volume: Performance insurance - main
players
There are no consolidated figures in the premium market according to the type of guarantee in question, but it is estimated that the largest percentage pertains to policies requested in connection with contracts entered into with the state and those covering the compliance of legal provisions. The only substitute product for performance bonds are bank guarantees, which in practice are not used too often given their high cost and the resulting reduction of available credit lines for bank clients. However, the performance of contracts executed by private parties is occasionally secured by means of retention guarantees and securities such as term deposit certificates or mortgages on real property. Products The most frequently used performance policies are those that cover the execution of contracts entered into with the state or contracts entered into by private parties, and those that cover the compliance of legal provisions. Contracts include public works contracts, supply contracts and contracts for the rendering of services. Judicial bonds and rent insurance also fall within the legal classification of performance bonds. Policies issued to cover contracts entered into with the state or contracts entered into by private parties present some differences that are discussed in other points of this document, but the coverage afforded is the same. The policies are listed below:
The percentages mentioned above may vary according to the party purchasing the insurance and the type of contract involved. Law 80 of 1993 governs all aspects associated with contracts entered into with the state. Under this law, all the coverages required in connection with a specific contract, including the following compulsory coverages: performance, advance payment (should it exist), wages and stability or quality (according to the type of contract involved), must be included in a Single Guarantee policy and must be issued from the start. In contracts entered into between private parties, these coverages may be issued in separate policies and, as a general rule, coverage for post-contractual issues (stability, quality and supply of spare parts) is not issued upon execution of the contract. As regards policies covering the compliance of legal provisions, the most frequently used are those defined in the tax and customs legislation which I shall describe briefly below. Policies contemplated under the tax legislation include those that must be furnished to the Colombian Tax Authority when requesting the refund of credit balances in income and value added (VAT) tax returns. Upon compliance of certain requirements, if the abovementioned tax returns show a credit balance in favor of the taxpayer, said taxpayer may request the refund of this amount within a relatively short period of time. To this effect, the state requests the furnishing of a performance policy. Tax legislation also contemplates the issuance of policies in connection with overdue tax obligations. When the Tax Authority and the taxpayer reach an agreement, the payment plan must be secured by means of a performance policy. Performance policies are typical payment guarantees and their issuance is consequently highly restricted in the market. The most frequently used policies contemplated in the provisions of customs law are the following:
Certain companies may achieve one of these ratings (granted by the Customs Authority) provided they comply with a series of requirements concerning the minimum value of the imported or exported goods. Through these ratings, the state delegates certain customs procedures in favor of a private person who thus gains access to a series of benefits, the most important of which being the automatic customs release of the imported goods. This facilitates the transaction of import and/or export formalities which, in the absence of these ratings, must be carried out following the normal protracted procedure. The beneficiary companies must furnish the Customs Authority with a performance policy to secure the fulfillment of the obligations defined for each of these categories. Customs brokerage companies and cargo agents: some private parties carry out these activities involving the transaction of import, export or customs formalities in the name and on behalf of importers and exporters. As in the above case, these are also services associated with the transaction of customs formalities that are delegated by the state in favor of private persons. The fulfillment of the obligations defined in the legal provisions governing each of these categories, as set out in the customs law, must be secured by means of a performance policy. The most important obligations are the following: completion and submission of the declarations and documents required under customs import and traffic regulations; accountability for the truth and preciseness of the data set out in the declarations and related documents transmitted electronically to the customs IT system; payment and cancellation of customs duties and whichever penalties that may apply. Short- and long-term temporary imports: the importer may request the Customs Authority to authorize that specific operations (the previous guarantees covered several operations carried out by the same principal) be carried out according to this special procedure. The short-term procedure is aimed at avoiding the payment of customs duties because the goods are to be re-exported within a short period, normally not exceeding six months. In these cases, the policy covers the obligation to re-export the goods within a specified term, or otherwise to proceed to their nationalization. The long-term procedure is used when the state finances the payment of customs duties by the importer in semi-annual installments, normally over a total period of five years. The payment of these semi-annual installments and the final nationalization of the goods upon completion of the term must be secured by means of a performance policy. There are some other specific customs operations that require the furnishing of a performance policy to secure obligations such as the presentation of documents within specified periods of time, or the nationalization of goods which for practical reasons are delivered to the importers before the completion of the normal procedure. Losses under these policies are registered by means of a unilateral declaration set out in an administrative record. An appeal may be lodged requesting the reversal of the decision before the same officer who issued the decision. Occasionally, appeals may be filed before said officer's superior. If the Customs Authority refuses to reverse its decision, a claim may be filed before a court dealing with administrative matters. Counterguarantees In Colombia, in the field of performance policies, the documents that insurance companies generally use as counterguarantees are "promissory notes with blank spaces accompanied by a letter of instruction". (A promissory note is a negotiable instrument based on a promise and, as such, the maker and the obligor are the same person.) This kind of counterguarantee binds the natural or legal persons signing them. Therefore, a person other than the policyholder / principal may become bound by signing the counterguarantee. The abovementioned promissory notes documents may be drawn to back a single policy or all the policies issued in favor of a specified client. A co-debtor may become jointly and severally liable for the promissory note obligations. Said co-debtor may be a legal representative or a third party who becomes personally liable for the debt. Exceptionally, as in the case of certain high-risk judicial bonds, the surety company may request that the obligations be secured by security interest in property, such as the endorsement of a term deposit certificate issued by a bank to be held as collateral. On other exceptional occasions, the surety company may request the constitution of a mortgage in its favor, which amounts to security interest in a specified item of real property. |
