- February 4, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Concept- The government has allowed the use of surety insurance bonds as a substitute for bank guarantees for infrastructure development.
What is Surety Bond?
- Surety Bond is a three-party agreement that legally binds together a principal who needs the bond, an obligee who requires the bond and a surety company that sells the bond.
- Surety bonds provide financial guarantee that contracts will be completed according to predefined and mutual terms.
- Surety bond is provided by the insurance company on behalf of the contractor to the entity which is awarding the project. When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses.
- It can effectively replace the system of bank guarantee issued by banks for projects and help reduce risks due to cost overrun, project delays and poor contract 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.
- Currently, Surety Bond for contractors is not being offered by insurance companies in the market to guarantee satisfactory completion of a project by a contractor and provide performance security to various government agencies
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.