The Insurance Regulatory and Development Authority of India (IRDAI) has issued final recommendations to ensure that the surety insurance industry in India develops in a controlled manner. From April 1, 2022, the IRDAI (Surety Insurance Contracts) Guidelines will be in force. A surety bond is a three-party contract in which one party (the surety) guarantees a second party’s (the principal’s) performance or obligations to a third party (the obligee). An insurance business provides surety to the obligee or government organization awarding the project on behalf of a principal or contractor.
What exactly is a surety bond?
A surety bond is a way for businesses to transfer risk. It guarantees the project owner (usually a government agency) that the appointed contractor will complete the assignment according to the contract terms. In the case of a default, the surety firm pays the project owner the agreed-upon amount (as per the contract). The contractor is charged a fee by the firm for writing the surety bond.
Advance Payment Bond: An Advance Payment Bond is a promise by the Surety provider to pay the outstanding amount of the advance payment if the contractor fails to finish the contract according to specifications or adhere to the contract’s scope.
Contract Bond: It assures the public entity, developers, subcontractors, and suppliers that the contractor will carry out the project’s contractual obligations. Bid Bonds, Performance Bonds, Advance Payment Bonds, and Retention Money are examples of contract bonds.
Performance Bond: The obligee will be covered if the principal or contractor fails to fulfill the bonded contract, according to the performance bond. If the obligee declares the principal or contractor in default and cancels the contract, the Surety may be called upon to fulfill the Surety’s bond obligations.
Retention Money: It is a portion of the sum due to the contractor that is held back and paid out once the contract is completed successfully.