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SURETY INSURANCE

 

    Surety Insurance                    

  Surety; the word itself means caution and is familiar to all ages. Even a layman would know that it is about finance and money. Surety Insurance is the latest addition to the insurance market. Surety insurance provides an assurance to the project owner in the form of a Surety Bond that the contractor would complete the project as per the agreed terms and conditions.

Who can buy:

Surety Insurance Contracts may be offered to infrastructure projects of government/private in all modes such as construction companies in India that cover road projects, housing/commercial buildings and other projects of Government/Private.

Surety Insurance contracts shall be issued only to specific projects and not clubbed for multiple projects.

Geographical Area:

Surety Insurance contracts shall be issued for projects only in India. Further, the payment of premium for the risk covered under the surety insurance contracts shall also be made in Indian rupees.

Types and Definitions of Surety Contracts

Advance Payment Bond: It is a promise by the Surety provider to pay the outstanding balance of the advance payment in case the contractor fails to complete the contract as per specifications or fails to adhere to the scope of the contract.

Bid Bond: It is an obligation undertaken by a bidder promising that the bidder will, if awarded the contract, furnish the prescribed performance guarantee and enter into contract agreement within a specified period of time. It provides financial protection to an obligee if a bidder is awarded a contract pursuant to the bid documents, but fails to sign the contract and provide any required performance and payment bonds.

Contract Bond: It provides assurance to the public entity, developers, subcontractors and suppliers that the contractor will fulfil its contractual obligation when undertaking the project.

Customs and Court Bond: This is a type of guarantee where the obligee is a public office such as tax office, customs administration or the court, and it guarantees the payment of a public receivable incurred from opening a court case, clearing goods from customs or losses due to incorrect customs procedures.

Performance Bond: It provides assurance that the obligee will be protected if the principal or contractor fails to perform the bonded contract. If the obligee declares the principal or contractor as being in default and terminates the contract, it can call on the Surety to meet the Surety’s obligations under the bond.

In large construction or infrastructure projects, bank guarantee/surety bond is a contractual requirement or precondition of the project owner for awarding an order to the contractor. In case the contract is not honoured, the bank/insurance company is called upon to pay the bond or otherwise assure the finalization of the contractual obligation.

Retention Money: It is a part of the amount payable to the contractor, which is retained and payable at the end after successful completion of the contract.

Features of Surety Insurance contract

It shall be a contract of guarantee under Section 126 of the Indian Contract Act, 1872.

It is a contract to perform the promise, or discharge the liability of a third person in case of default. The person who gives the guarantee is called the “Surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”

It benefits the project owners as insurers can work together with

·         Banks or other financial institutions such as NBFCs to share risk information, technical expertise to monitor projects, cash flow amongst other aspects.

·         Contracting awarding authorities in order to evaluate the risk with more information and data.

 

Need for Surety Bonds:

Surety Bond is an option and an alternate to bank guarantees. Surety bonds are typically conditional whereas bank guarantees are on demand of collaterals and other processes.

Banks are not providing any waivers on collaterals for granting bank guarantees and are compelled to exercise tighter controls in issuing bank guarantees due to increase in NPA’s after the big corporate failures. Contractors, developers are in a fix as obtaining bank guarantees has become very difficult.

Luckily, surety bonds shall be accepted as an alternative form of guarantee by Reserve Bank of India (RBI) and Government Departments and accordingly reflect in the appropriate contract documents.

Surety Bond is an instrument that protects the project owner, contractors against default. Participation of the insurer is an added value to all stakeholders.

Disclaimer:   

Zen Insurance is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products

 

 

 

 

 

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