Contract Guarantee or Bond Insurance

Prevents monetary loss as a result of breach of contract, at a larger scale.

Bonding is a kind of contract which normally comes in the form of either a Bank Guarantee or Insurance Guarantee. The guarantee is given by a Surety to accept responsibility for the performance of a contractual obligation entered into by one party with another in the event of former’s default.

Bonds, which may be required in almost every sphere of interpersonal and inter-corporation transactions, are very wide in scope. Generally speaking, it is not a form of insurance business but because of the fact that insurance companies are financial institutions, their bonds are acceptable, hence the involvement of insurance companies in bonding business, particularly those bonds which can generate other classes of insurance business for example, bonds business which are secured together with other project insurances like the Contractors'/Erection All Risks, Public Liability and Workmen's Compensation insurance.

Under the PIAM Bond Underwriting Guidelines, the total bond business which an insurer can underwrite is limited to 5% of the total gross premium of the company based on the previous financial year (not restricted to new business only but can include extension of existing contracts, i.e. on total).

There are certain peculiar features in Bonds:

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A bond once issued, is non-cancellable before its expiry date.

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All bonds issued to contractors for government projects are demand bonds and are worded in such a way that they can be invoked by the holder of the bond without any reason and explanation. The Insurer is obliged to pay upon demand notwithstanding any dispute or protest by the contractor or insurer or any third party.