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Contracts come with the risk of non-payment or non-performance. Especially for small businesses, getting bonded and insured is crucial to gaining trust. This is when surety bond insurance comes into the picture. It is a unique form of insurance that ensures that the terms of the contract are met.
Surety bonds lower indirect costs compared to bank guarantees for suppliers in infrastructure projects. Specific bonds safeguard against unethical activities in sectors like insurance brokers or employee fraud.
This article covers all the information you need regarding bond insurance. Let’s begin!
What is surety bond insurance?
In its most basic form, a surety bond, also known as assured bond insurance, is an official declaration to ensure efficiency, payment, or compliance with a contract. The fact that surety requires a three-party agreement (the principal, the obligee, and the surety) makes it one of a kind.
The principal, who typically represents a contractor or business proprietor, must secure a surety bond from the obligee, typically a government agency, as an assurance against non-performance.
For example, an insurance broker bond is one kind of surety bond that safeguards against unethical business activities by insurance brokers on behalf of the customer.
Understanding the types of surety bond insurance
Fidelity bond insurance
Fidelity bond insurance aims to protect a company from financial harm that may result from the fraudulent actions of one or a group of persons. Businesses often get this insurance to protect themselves against workers’ fraudulent actions.
Employee theft may damage businesses financially and, in some cases, may drive them into bankruptcy. In addition to protecting workers against fraudulent behaviour, fidelity bond insurance protects customers who fall victim to similar offences. This bond or insurance also covers the following areas: asset theft, forgery, identity theft, and more.
In recent years, fidelity bond insurance has become more prevalent in India. Here are a few fidelity bond insurance companies worth mentioning: SBI General Insurance, HDFC Ergo, Tata AIG, and more.
Insurance bond
An insurance bond is another kind of surety bond insurance that shields a company against losses brought on by a contractor’s or business owner’s failure or non-performance—for example, by not finishing a project or providing a service.
The Insurance Regulatory and Development Authority of India (IRDAI) regulates these bonds issued by insurance companies.
Understanding insurance bond vs bank guarantee
| Insurance bond | Bank guarantee |
| One kind of surety bond that ensures payment when non-performance of a contract takes place. | One kind of financial instrument that guarantees the recipient that the applicant will satisfy a contractual commitment. |
| Collateral is not needed for an insurance bond since the insurer bears the risk of payment. | Collateral is often needed to get a bank guarantee, and this collateral might be money, real estate, or other assets. |
| Regulated by the IRDAI. | Regulated by the Reserve Bank of India (RBI). |
| An insurance bond is less expensive than a bank guarantee because the premium is based on the insurer’s projection of risk. | Due to the bank’s fee and interest costs on the collateral, a bank guarantee can be more expensive than an insurance bond. |
| Insurable bonds are more flexible than bank guarantees since they may be adjusted to the parties’ requirements. | As an RBI-mandated structure and provision, a bank guarantee is more standardised than an insurance bond. |
How to get bonded and insured for a small business?
Among the most vital things one needs to do when starting a new business is to safeguard the customers you serve. This entails obtaining the right surety bond and company insurance coverage. The process includes:
- Finding a surety business or agent to provide you with a quote is the first step towards getting a bond. After that, the surety will examine the business owner’s personal and financial records.
- Following the business owner’s approval by the surety company, the obligee and the company’s proprietor will get a bond application to fill out.
- The company owner then signs an indemnity agreement, which commits them to compensate the surety firm if any demands are made against the bond and pay the premium when the bond is issued.
Conclusion
Insurance bonds reduce risks in contracts through assurance of performance. Far more than just legal paperwork, these bonds inject confidence into contracts through the power of guarantee.
As India builds her future, these bonds spur growth responsibly by fostering trust between parties. That’s the beauty of surety at work.
FAQs
No, a surety bond is not the same as insurance. Surety bonds are three-party agreements that guarantee a principal’s fulfilment of an obligation to an obligee via a surety. On the other hand, insurance transfers loss risk between two parties for a premium.
Yes, a surety bond is legal in India and regulated by the Insurance Regulatory and Development Authority of India (IRDAI). The government of India has allowed the use of surety bonds as an alternative to bank guarantees in cases of government procurement and also for gold imports.
Some benefits of buying fidelity bond insurance are:
It makes trade licence applications easier.
Commercial property insurance premiums may be reduced with this coverage.
Policyholders may cover any lost assets up to the amount covered.
These bonds stabilise the business as the insurance company pays for the act
Yes, a surety bond can be cancelled. While some sureties may not allow it, the majority do allow sureties to terminate their bonds. Some can only get rid of them after they acquire the original contract back or the certificate of renewal from both parties.
If the principal fails to meet the conditions of the bond, the surety will pay reparation, which has to be less than the amount in the bond. The principal will then be expected to reimburse the surety for the claims paid.
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