IRDAI Guidelines to Surety Insurance Contracts: An Overview

The Insurance Regulatory and Development Authority of India (IRDAI) while exercising the powers instituted in it under section 14(2)(i) of IRDA Act, 1999 has come out with guidelines IRDAI (Surety Insurance Contracts) Guidelines, 2022 on 3^rd Jan 2022 which are supposed to come into force from 1^st April, 2022. The purpose of introducing these guidelines is to regulate the insurance surety business while dealing with the unique risks and features of surety insurance.

What is meant by Surety Insurance Contracts?

A Surety Insurance Contract is essentially a contract of Guarantee under section 126 of the Indian Contract Act, 1872^[1]. It is nothing but a contract where the surety promises to perform or discharge the liabilities of a third party in case of that third party defaults in fulfilling his obligations.

A contract of surety is deemed to be a contract of insurance only if it has been executed by a surety who has been registered as an insurer under the provisions of Insurance Act, 1938 with a view to transact the business of general insurance.

As per the guidelines issued, Surety Insurance Contracts can be in the form of Contract Bond, Bid Bond, Retention money, Advance Payments Bond, Performance Bond.

Applicability of IRDAI (Surety Insurance Contracts) Guidelines, 2022

These guidelines shall be applicable to all the Insurers who are registered under the Insurance Act, 1938 who are engaged in the business of General Insurance and Surety Insurance. However, these insurers are subjected to the eligibility criteria set out in the guidelines.

Highlights of IRDAI (Surety Insurance Contracts) Guidelines, 2022

1. The purpose of the Surety Bond is to protect the beneficiary against the acts or events that prevent the principal to perform his obligations.
2. A Surety Insurance Contract is essentially a contract of Guarantee where a surety promises to perform or discharge the liabilities of a third party in case of that third party defaults in fulfilling his obligations
3. Surety Insurance Contracts can be in the form of Contract Bond, Bid Bond, Retention money, Advance Payments Bond, Performance Bond.
4. The guidelines mandate that insurers need to obtain a board approved underwriting philosophy for the Surety Insurance business.
5. The purpose of the surety bonds is to protect the beneficiary from any act or event which has the capacity to impair the underlying obligations of the principal. Thus, the surety bonds guarantee the performance of a wide variety of obligations right from construction contracts to service contracts to licensing and commercial undertakings.
6. The upper limit of guarantee has been fixed at 30% of the contract value and it cannot exceed that.
7. The underwritten premium in a given financial year for any of the general insurers belonging to a surety insurance business shall not exceed the mark of 10 percent of the total gross written premium subject a maximum limit of Rupees 500 crores.
8. The guidelines prohibit issuing of contracts where the underlying assets or commitments are situated outside the country.
9. All the surety insurance products shall be subjected to all the provisions and relevant procedures of File and Use as has been stipulated in the Guidelines on Product Filing Procedures for General Insurance Products. The guidelines further state that an Insurer cannot market the Surety Insurance products till the time the same products have not been filed and noted by the Authority.
10.  The data of Surety Insurance Contracts shall be underwritten by all the general insurers and this data shall further be submitted to Insurance Information Bureau of Indian (IIBI) in the prescribed manner. The general insurers are supposed to maintain the relevant records and data pertaining to the Surety Insurance business and this data shall be submitted to the Authority in the manner and time when it is requisitioned by the Authority.
11.  A surety bonds has been defined as a three party contract where the one party (surety) guarantees the performance and obligations of the second party which is the principal to a third party who is called the obligee. The surety is provided by an insurance company on behalf of the contractor or the principal to the government entity or obligee awarding the project.
12.  The surety can offer insurance contracts to infrastructure projects of private or government in all modes.
13.  Once these guidelines come into force, no person can transact the business of surety insurance in India unless that person is an Indian Insurance Company defined under the section 2(7A) of the Insurance Act, 1938.
14.  The surety insurance products cannot be marketed unless they have been filed and noted by the IRDAI.
15.  Only general insurers registered with the IRDAI have been permitted to transact into the insurance business provided they are compliant with the eligibility criteria laid down in the circular by the IRDAI.

Conclusion

Given the unique type of risks involved and peculiar nature of the surety insurance business and the specific features of the insurance products, the above mentioned guidelines have been brought to regulate and develop the business of Surety Insurance. The given guidelines will ensure that an orderly development of the surety insurance business and surety bond market. The guidelines follow the recommendations of the working group set up by the regulator to promote orderly development of the surety insurance business in India.

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