Advance payment insurance helps protect the customer's property interest if a contractor or supplier fails to perform the obligations secured by an advance. In Kazakhstan's public procurement, a supplier's civil liability insurance contract, drawn up on the approved standard form, is used for this purpose.

An advance allows a contractor to buy materials, mobilize staff and start work, but it exposes the customer to the risk of losing funds. Securing the advance reduces that risk and confirms the supplier's readiness to answer for proper performance of the contract.

Advance payment insurance and construction and erection risks insurance are different products

Advance payment security is tied to the supplier's obligation to return or work off the advance received. It does not replace construction and erection risks insurance, which protects the site, materials, equipment and liability for damage during construction.

Criterion Advance payment security CAR/EAR
Main risk Supplier's failure to perform its obligations Damage to the site or property
Protected interest Compensation of the customer's loss Safety of the works, materials and liability
Basis for payment An event under the standard or individual contract Accident, fire, natural hazard and other covered risks

How it works in public procurement

The public procurement rules provide for several ways to secure performance of a contract and an advance. One of them is a supplier's civil liability insurance contract concluded on the standard form approved by the authorized body.

The subject of such insurance is the supplier's property interest connected with its obligation to compensate the customer for harm caused by non-performance or improper performance of obligations under a public procurement contract.

Important: an insurance company may not arbitrarily replace the terms of the standard contract with its own wording if the policy is used as security in public procurement. The document must comply with the current form and the requirements of the web portal.

Which forms of security may be used

Depending on the current rules and the terms of a specific procurement, a supplier may use:

  • money deposited or blocked in the prescribed manner;
  • an electronic bank guarantee;
  • a supplier's civil liability insurance contract on the standard form;
  • another method expressly provided for by current legislation and the procurement documents.

The choice of method is not always entirely free: you need to check the procurement contract, the supplier's category, whether treasury support applies and the current version of the rules.

Performance security and advance security

These are two related but separate requirements. Contract performance security relates to the supplier's entire obligation. Advance security relates to the amount of prepayment, if the contract provides for one.

The size of the advance is not universal and is not always 30%. It is determined by the terms of the specific procurement, the contract and the applicable rules. In some cases special amounts or exceptions apply, for example under treasury support.

Step-by-step procedure for the supplier

  1. Study the draft contract. Check the amount of the advance, the amount of security, the deadline for providing it and the permitted form.
  2. Prepare the documents. The insurer assesses the company, its experience, its financial position and the parameters of the contract.
  3. Obtain an offer. It may contain the rate, security requirements, limits and a list of additional documents.
  4. Check against the standard form. For public procurement, the contract must comply with the approved terms.
  5. Execute the electronic document. Observe the portal's requirements and the deadline for providing security.
  6. Monitor the validity period. Cover must span the required period and be extended correctly if the contract changes.

What the insurance company assesses

Finances

Financial statements, equity, debt burden, cash flow and the ability to perform the contract.

Experience

Similar completed projects, business reputation, claims and cases of contract termination.

Contract

Amount, term, complexity of the works, schedule, margin, subcontractors and the procedure for using the advance.

The insurer may refuse, request additional security or change the rate if it considers the risk high. Winning a tender does not in itself guarantee that an insurance contract will be issued.

Documents for review

  • an application or the insurer's questionnaire;
  • the procurement contract with its appendices and the technical specification;
  • information on the amount of the advance and the security required;
  • financial statements with breakdowns;
  • a list of similar contracts performed;
  • the work schedule, cost estimate and plan for using the advance;
  • information on staff, equipment and subcontractors;
  • constituent and registration documents;
  • information on court disputes, arrears and previous losses;
  • additional security, if required following underwriting.

What the cost depends on

The old claim of a rate "from 2.1%" can no longer be regarded as a standard. The cost of insurance is set individually and depends on the amount of liability, the term, the supplier's financial position, its experience, the type of work, the contract terms and the policy of the particular insurer.

A low rate may come with additional requirements or restrictions. For a standard public contract, it is critically important that the commercial offer does not change the mandatory terms of the form.

When an insurance payment may be made

The grounds are determined by the contract and legislation. Usually this means harm to the customer resulting from the supplier's non-performance or improper performance of its obligations. To receive a payment, you need documents confirming the breach, the amount of the claim and compliance with the procedure.

Insurance does not release the supplier from performing the contract, does not replace a penalty and does not rule out recourse or other claims where provided for by law and the contract.

Private tenders and commercial contracts

In procurement by private companies, the standard public form may not apply. The customer and contractor agree on a bank guarantee, insurance, a pledge, retention of part of the payment or another mechanism.

Such a contract requires an especially precise description of the event: it is not enough to write "the contractor did not perform the work." You need to define which breaches are covered, how the amount of the loss is established, which exclusions apply and when the customer may submit a claim.

Bank guarantee or insurance

It cannot be said that insurance is always cheaper and simpler than a bank guarantee. A bank and an insurer use different assessment and security methods. For one company a guarantee will prove more advantageous, for another an insurance contract.

Compare not only the fee or premium, but also collateral requirements, the effect on credit limits, processing times, the terms for making a claim and the consequences of a payment.

The role of Polis Re

Polis Re can help gather documents, present the risk to insurance companies and compare offers. The final decision on accepting the risk, the rate and the terms is made by a licensed insurer.

Insurance services are provided only by an insurance company holding a valid licence for the relevant class. An intermediary or consultant does not become a party obliged to make an insurance payment.

Summary: advance payment security protects the customer from the consequences of the supplier's non-performance. In public procurement, use the current standard form of liability insurance, check the portal's requirements and do not rely on old fixed rates or advance amounts.

This material is for information purposes only. Procurement rules and forms of security may change; before arranging cover, check the current rules and the documents of the specific procurement.