For companies
Advance payment insurance: securing the return of a prepayment under a contract
Many supply, construction and service contracts provide for an advance payment. For the client this is a risk: the money has already been transferred, but the work may not be done. That is why clients often require the contractor to provide security for the return of the advance. Advance payment insurance is one way to provide such security. At Insurance Center you can calculate the cost and compare offers from licensed insurers.
Who it is for
The policy is taken out by the contractor receiving the prepayment, and the client is the beneficiary. This arrangement benefits both sides: the client protects its money, and the contractor receives the advance and can start work without tying up working capital in collateral.
Who needs the policy
- Construction contractors
- Suppliers of equipment and goods
- Service providers receiving large prepayments
- Bidders in procurement where advance payment security is required
Calculator parameters
- Advance amount, which is also the sum insured
- Risks: non-performance of obligations, bankruptcy
- Contractor's liability as an additional condition
- Contract meeting Ministry of Finance requirements
What risks are covered
Non-performance of obligations: the contractor did not complete the work or deliver the goods on time and did not return the advance at the client's request. Bankruptcy: the contractor has been declared bankrupt and cannot return the money received. The choice of risks depends on the client's requirements: sometimes one of them is enough, sometimes the security must cover both. The additional condition on the contractor's liability extends the client's protection if the contract concerns construction or installation work. It is best to check which wording you need against the draft contract before applying to the insurer.
What to check
- Client requirements. Whether the client accepts an insurance policy as security and what contract wording it needs.
- Term. The policy must remain in force until the advance is fully offset, with a margin for possible delays.
- How the amount is reduced. Whether the sum insured decreases as the advance is closed out by acceptance certificates.
- Recourse. How the insurer will recover the amount paid out from the contractor.
Important to understand. Advance payment insurance does not release the contractor from liability. If the insurer pays compensation to the client, it is usually entitled to claim that amount from the contractor by way of recourse.
When a claim may be declined
A payout may be refused if the contract was changed without the insurer's consent, the advance was spent or offset in accordance with the contract terms, the client itself breached its obligations and thereby made performance impossible, or the claim was made after the insurance period ended. A refusal is also possible if inaccurate information was provided at application. The full list is set out in the insurance rules.
What affects the cost
The main factors are the advance amount and the policy term. The insurer assesses the contractor's financial position, its experience with similar contracts and the nature of the contract. The set of risks also matters: cover for both non-performance and bankruptcy is broader than for a single risk. Additional conditions, such as the contractor's liability or a contract meeting Ministry of Finance requirements, are also factored into the calculation. The insurer quotes the final price after reviewing the documents.
What to prepare
- The company's constituent documents and BIN
- Financial statements for recent periods
- The contract or draft contract with the advance terms
- The client's security requirements
- Information about similar contracts completed
How to apply
Online calculation
Enter the advance amount, risks and additional conditions in the Insurance Center calculator.
Comparing offers
We will send requests to insurers and compare their terms and prices.
Policy and payment
Sign the contract, pay the premium, and the policy will be sent to your email.
What to do if an insured event occurs
- The client records the breach: missed deadlines, non-delivery or the contractor's withdrawal from the contract.
- The client sends the contractor a written demand to return the advance.
- If the advance is not returned, the client notifies the insurer within the period set by the contract.
- The contract, payment documents and correspondence with the contractor are attached to the claim.
- The insurer reviews the documents and decides on the payout.
How to choose a programme
Start with the client's requirements: they determine the acceptable form of security, the set of risks and the term. Then compare insurers on price, speed of application review and the list of required documents. For large and long-term contracts, it is worth discussing in advance how the sum insured will decrease as the advance is offset.
Keep deadlines in mind: preparing documents and the insurer's review of the application take time, and the client usually expects the security by a certain date. It is best to start the process as soon as the contract terms and advance amount are known. If you take part in procurement regularly, it makes sense to go through the insurer's vetting once so that subsequent policies are issued faster.
This material is for reference only; final terms are set by the insurance rules and the contract.
How Insurance Center helps
We will check the client's security requirements, select insurers willing to accept your risk and help prepare the documents so you meet the contract signing deadline. Phone: +7 727 225 40-40.
