An insurance surety bond is a financial instrument where an insurance company acts as a 'surety' to guarantee that a contractor will fulfill their obligations according to the agreed terms of a contract. This bond serves as a form of financial security, ensuring that contractual duties are performed as specified.
2. How do insurance surety bonds work?
In practice, if a contractor fails to meet the terms of the contract, the insurance company (surety) will step in to compensate the hiring party (obligee) for any losses incurred due to the contractor's non-compliance. This might involve the surety financing the completion of the work or paying a specified sum as a penalty.
3. Why are contractors encouraged to use insurance surety bonds?
Contractors are encouraged to use these bonds as they provide added security for both the contractor and the employer. It ensures that the contractor has financial backing to complete the job and gives the employer a direct remedy if the contract terms are not met.
4. What advantages do insurance surety bonds offer over bank guarantees?
Insurance surety bonds are often preferred over bank guarantees because they can be more cost-effective and less taxing on a contractor’s liquidity and credit availability. Unlike bank guarantees, which typically require collateral, surety bonds generally do not freeze the contractor's capital or credit lines.
5. What was the significant change regarding insurance surety bonds announced by the Centre?
The Indian government recently equated insurance surety bonds with bank guarantees for all government procurement. This policy change allows contractors to submit surety bonds in place of traditional bank guarantees when bidding for government projects, thereby broadening their financial options.
6. How much in insurance surety bonds has been issued following this change?
Following the policy change, insurance firms have issued around 700 insurance surety bonds valued at approximately ₹3,000 crore. This indicates a significant uptake in the use of these bonds for securing national contracts, particularly in the construction and maintenance of national highways.
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