The National Highways Authority of India (NHAI) recently conducted a collaborative brainstorming session to expedite the adoption of Insurance Surety Bonds for its contracts. These bonds provide a written assurance of compliance, payment, or performance, involving a unique three-party agreement. The ‘Principal’ (contractor) purchases the bond, the ‘Surety’ (insurance company) guarantees performance, and the ‘Obligee’ (government entity) benefits from the bond. This arrangement enhances security for infrastructure projects, benefiting contractors and the principal. Insurance Surety Bonds reduce the need for large collateral compared to bank guarantees, supporting contractors’ financial health, and fostering growth.
Facts/Terms for UPSC Prelims
- Surety Bond: A written agreement where an insurance company (surety) guarantees the performance of an obligation by a contractor (principal) to a beneficiary (obligee), ensuring fulfillment of contractual terms. It differs from traditional insurance in its three-party structure.
- Principal: The contractor purchasing the surety bond, committing to fulfill the contractual obligation. In case of non-compliance, the beneficiary can make a claim on the bond.
- Surety: The insurance company providing the financial guarantee, assuring the beneficiary that the principal will perform as agreed. If the principal defaults, the surety covers incurred losses.
- Obligee: The beneficiary, often a government body, requiring the bond for protection. The obligee benefits from the financial guarantee if the principal fails to fulfill the agreed-upon terms.
- Collateral: Assets pledged as security for a loan or obligation. Insurance Surety Bonds generally require less collateral than traditional bank guarantees, freeing up funds for contractors’ growth.
