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About A Insurance Surety Bonds

Context:

Recently, the National Highways Authority of India (NHAI) organised a brainstorming session with stakeholders to expedite the adoption of Insurance Surety Bonds for its contracts.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Insurance Surety Bonds
  2. Advantages of Insurance Surety Bonds

Insurance Surety Bonds:

  • Insurance surety bonds are written agreements that guarantee compliance, payment, or performance of a specific act.
  • Role of Insurance Companies: These bonds involve insurance companies acting as “Surety,” providing a financial guarantee that a contractor will fulfill its obligations according to agreed terms.
  • Three-Party Agreement: Surety bonds involve a unique three-party agreement.
Parties Involved:
  • Principal: The party purchasing the bond, committing to fulfill a promised action.
  • Surety: The insurance company guaranteeing the performance. If the principal fails, the surety becomes liable for losses.
  • Obligee: The party requiring the bond, often a governmental organization for most surety bonds.

Advantages of Insurance Surety Bonds

  • Security for Infrastructure Projects: Offers security for infrastructure projects, protecting both contractors and principals.
  • Diverse Contractor Coverage: Meets the needs of various contractors, especially in today’s volatile environment.
  • Contractual Guarantee: Provides a contractual guarantee that business deals will adhere to agreed-upon terms.
  • Loss Recovery: If the contractor fails to meet terms, the principal can make a claim on the surety bond to recover incurred losses.
  • Minimal Collateral: Unlike bank guarantees, surety bond insurance doesn’t require substantial collateral, freeing up funds for contractors’ business growth.
  • Debt Reduction: Helps reduce contractors’ debts, addressing financial concerns.

February 2024
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