A financial guaranty represents a promise that is made by a company or agency that will cover a business’s financial obligations in the event they are unable to pay for them. A financial guaranty insurance policy is the legal document that outlines this financial commitment. Because these are often complicated agreements, it is very important to understand how these policies work before agreeing to any coverage.
These are three-party agreements. There is the party that needs insurance, or principal. There is the business that is requiring the insurance, which is the obligee. Then there is the guarantor, who is the underwriter, or agency that provides the financial backing.
This type of financial guaranty insurance policy will generally cover both the principal payment and any affiliated interest, but you should always ensure you completely understand any policy’s coverage. Many policies do not cover the full liability amount, just a portion. Always make sure you’re meeting any contractual requirements before securing a policy.
It is very common for a parent agency to offer financial guarantees for its subsidiaries, as it would allow a business to essentially invest in itself.
It is strongly recommended that you talk to a professional when making any large legal decisions involving your business, especially when it comes to insurance.