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Insurance Surety Bonds

Context:

Recently, some of the leading general insurers like New India Assurance, SBI General Insurance etc. have announced their plans to issue Surety Bonds, but nobody has been able to do so due to lack of supporting elements.

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.

-Source: The Hindu


June 2024
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