Environmental disasters have occurred for centuries around the world. Whether accidental events or human failures, these incidents cause major impacts on affected communities and the environment - which can take decades to recover.

Economic development undoubtedly entails increased risks in productive activities. According to Ulrich Beck, in his book "Risk Society", "the social production of wealth is systematically accompanied by the social production of risks."[1]

The question then arises: how to avoid and minimize threats and risks? And, going further, when these risks and threats are not contained and result in environmental accidents, how does one isolate and scale the effects so as not to compromise the development process or life in communities?

In Brazil, when environmental accidents result from the exercise of economic activity, the private entities involved actively participate in the task of addressing the consequences, through measures for compensation, repair, and mitigation of impacts on the community.

Compensation and mitigation of impacts caused by the exercise of business activities can occur in several ways. Among them is an agreement with commitments to implement measures, such as infrastructure works or provision of services to the community.

These commitments are made through agreements with public authorities and entered into in the context of public civil actions. They are sometimes fulfilled through subcontracting, when they cover activities that are not in the core business of the company involved.

A contractual framework is thus formed, governed by both public and private law, to serve the interests of the population. It is extremely important that these arrangements work well to ensure that the population does not suffer the consequences of contractual inefficiencies.

An instrument to help in the governance of this structure may be a performance bond, as it is known in the United States. Through this type of contract, an insurer guarantees to a beneficiary the performance of a contract entered into by a party, who assumes the position of policyholder.

This insurance acts as a governance tool for construction works and service contracts. It can be used to safeguard public and private interests and ensure regular performance of contracts, as well as to contribute to improving the quality of projects and the procurement environment itself.

When entering into a conventional insurance contract, insurers need to assess and quantify the risk that the specific event will occur based on the elements present - this is the underwriting process. Based on the probability that a claim will occur, insurers determine the amount to be charged to the insured - the premium.

This reasoning does not apply to performance bonds. The insured risk (non-fulfilment of the obligations assumed by the party in the main agreement) is provided for by the parties, which allows them to strive to prevent the risk from materializing.

In addition, the insurer takes responsibility for controlling the risk and monitoring its evolution as the project is implemented, to mitigate financial losses in the event of a claim.

This is also why insurers require a counter-guarantee from the policyholder when offering the performance bond. This, in turn, serves as a mechanism to align interests, as the insurer will be able to enforce the counter-guarantee directly from the policyholder.

This system works as an incentive, something more than a simple contractual relationship between insurer and insured. In fact, it encourages regular performance of the contract.

If this incentive system fails to prevent a claim, the insurer guarantees that it will act to reduce the damage caused by the breach of contract. In that case, it can:

  • finance the contractor to finalize performance of the contract;
  • itself undertake to perform the scope of the contract by engaging a substitute interested party; or
  • indemnify the excess cost generated for the beneficiary to directly perform the scope of the contract or replace the contractor.

The use of a performance bond as a guarantee in contracts entered into to deal with the consequences of environmental accidents has many benefits. Both to improve the quality of procurement and to reduce costs arising from breach of contracts. The result is greater alignment of interests between the public authorities, companies responsible for accidents, and the communities affected.


[1] Beck, Ulrich. Risk society: towards another modernity. Translation by Sebastião Nascimento. São Paulo. 34. Ed. 2010, p. 23.