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Insurance Surety Bonds

Insurance Surety Bonds:

Insurance companies have issued about 700 insurance surety bonds valued about ₹3,000 crore after Centre makes the instrument on par with bank guarantees for all government procurements.

  • Surety Bond is a promise to be liable for the debt, default, or failure of another.
  • It is a three-party contract in which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).
  • Insurance Surety Bonds is a financial instrument, where insurance companies act as ‘Surety’ and provides the financial guarantee that the contractor will fulfil its obligation as per the agreed terms.
  • It is a risk transfer mechanism wherein an insurer provides a guarantee to a beneficiary or obligee that the principal or contractor will meet his contractual obligations.
  • In case the principal fails to deliver his promise, a monetary compensation is paid to the obligee by the insurer.
  • There are 3 parties involved:
    • The Surety (Insurance Companies) will provide the financial guarantee to the Obligee /beneficiary.
    • Obligee or Beneficiary (example-Government, Infrastructure Development Authorities etc.) -the party that needs the surety and is often the beneficiary of the surety bond.
    • Principal (could be the owner or contractor)-the party that purchases the Surety bond from an insurer as a guarantee and undertakes a commitment to perform the obligations as per the contract entered.