Surety Bonds - Collateral Free Alternative for Projects

 A surety bond is a contract between three parties—the principal (you), the surety (us) and the obligee (the entity requiring the bond)—in which the surety financially guarantees to an obligee that the principal will act in accordance with the terms established by the bond. 

The purpose of a surety bond is to guarantee a specific obligation will be fulfilled by bringing 3 parties together in a mutual, legally binding contractual agreement.

1. The principal is the individual or business that purchases the bond as a guarantee they'll fulfill an obligation.
2. The obligee is the entity that requires the bond to guarantee the fulfillment of an obligation and reduce the likelihood of financial loss due to noncompliance.
3. The surety is the insurance company that issues the bond and guarantees the principal business or individual's obligation. 

If a principal fails to fulfill their obligation according to the terms of their surety bond, harmed parties (typically the obligee or consumers) can file a claim against the bond to recover their financial losses. The issuing surety company will pay valid claims up to the full bond amount as outlined on the form's legal language. The bonded principal must then reimburse their surety company in full. 

• According to new guidelines Insurance companies can launch the much-anticipated surety bonds now.
• The regulator has said the premium charged for all surety insurance policies underwritten in a financial year, including all installments due in subsequent years for those policies, should not exceed 10% of the total gross written premium of that year, subject to a maximum of Rs 500 crore.
• As per Insurance Regulatory and Development Authority of India (IRDAI), Insurers can issue contract bonds, which provide assurance to the public entity, developers, subcontractors and suppliers that the contractor will fulfil its contractual obligation when undertaking the project.
  • Contract bonds may include: Bid Bonds, Performance Bonds, Advance Payment Bonds and Retention Money.
    • Bid Bonds: 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.
    • 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.
    • 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.
    • 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 contrac.