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Surety Bonds

2023 SEP 29

Preliminary   > Economic Development   >   Indian Economy and Issues   >   Financial market

Why in news?

  • Recently, some of the leading general insurers like New India Assurance, SBI General Insurance etc. have announced their plans to issue Surety Bonds, but nobody has been able to do so due to lack of supporting elements.
  • The Ministry of Finance and the Ministry of Road Transport and Highways are putting pressure on the Insurance Regulatory and Development Authority of India (IRDAI) to push the insurance industry to launch surety Bond Products.

What is Surety Bond?

  • Surety bond can be said as a promise to be liable for the debt, default, or failure of someone else.
  • 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).

How Surety Bonds will work?

  • A 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.

PRACTICE QUESTION

Consider the following statements regarding ‘Surety Bonds’:

1. It can effectively replace the system of bank guarantee, issued by banks for projects.

2. It cannot issued for road contracts in India

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer