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What Is A Surety Bond?

Focus: GS III: Indian Economy

Why in News?

Union Minister for Road Transport and Highways launched one of India’s first-ever Surety Bond Insurance product from Bajaj Allianz.

What is a Surety Bond?

  • A surety bond is a legally binding contract entered into by three parties—the principal, the obligee, and the surety.
  • The obligee, usually a government entity, requires the principal, typically a business owner or contractor, to obtain a surety bond as a guarantee against future work performance.
  • Surety bonds are mainly aimed at infrastructure development, mainly to reduce indirect cost for suppliers and work-contractors thereby diversifying their options and acting as a substitute for bank guarantee.
  • Surety bond is provided by the insurance company on behalf of the contractor to the entity which is awarding the project.
  • Surety bonds protect the beneficiary against acts or events that impair the underlying obligations of the principal. They guarantee the performance of a variety of obligations, from construction or service contracts to licensing and commercial undertakings.

IRDAI guidelines for surety bonds:

  • The premium charged for all surety insurance policies under written in a financial year, including all instalments due in subsequent years for those policies, should not exceed 10 per cent of the total gross written premium of that year, subject to a maximum of Rs 500 crore.
  • The limit of guarantee should not exceed 30 per cent of the contract value. Surety Insurance contracts should be issued only to specific projects and not clubbed for multiple projects.

February 2023
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