Context:
Recently, the National Highways Authority of India (NHAI) organised a brainstorming session with stakeholders to expedite the adoption of Insurance Surety Bonds for its contracts.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- Insurance Surety Bonds
- 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.
