Assured Bond Insurance

Types of surety bonds in Canada

Surety bonds in Canada generally fall into two categories: contract surety bonds and commercial surety bonds. The type you need will depend on the work you’re doing and who is requiring the bond. Let's take a look:

Contract surety bonds

Contract surety bonds are most commonly used in the construction industry as a guarantee between contractors and construction firms. These bonds offer assurance that the contractor will meet contract obligations, such as completing the project on time and according to the contract terms. They also help make sure that subcontractors, labourers and suppliers get paid for their work and materials properly. There are several types of contract surety bonds for the construction industry, including:

• Bid bonds

• Performance bonds

• Payment bonds

• Wage and welfare bonds

• Maintenance bonds

• Labour and material bonds

• Lien bonds

• Supply bonds

Commercial surety bonds

Commercial surety bonds are what make sure a business and its owner follow licensing rules while carrying out their work. These bonds are all about protecting the public against fraud, misrepresentation or unethical business practices by the bonded entity. There are several types of commercial surety bonds, such as:

• Commercial contract bonds

• Licence and permit bonds

• Fidelity bonds

• Fiduciary bonds

• Judicial bonds (court bonds)

• Performance bonds

• Miscellaneous bonds

How does surety underwriting work?

Surety underwriting is how a surety decides whether to issue a bond and what it should cost. Unlike with regular insurance, the surety is looking at whether your business is in a position to meet its obligations and, if needed, repay the surety after a valid claim.

In other words, the surety wants to understand how your business operates and whether it has the financial strength and experience to stand behind the bond. That’s why surety bonding is often described as a financial assurance rather than insurance.

To get that picture, the surety reviews a mix of information about you and your business, including:

How does this affect your approval?

Generally, businesses with strong financials, relevant experience and a good payment history tend to receive faster approvals and lower premium rates. However, businesses with higher-risk profiles may see longer review times or higher premiums.

What documents do you need to get a surety bond?

When you apply for a surety bond, the surety needs enough information to understand your business and the obligation being guaranteed. They will often start with your basic financial information, such as the last two years of your:

• Business financial statements to review cash flow, assets and liabilities

• Personal financial statements for owners

Depending on the type of bond you need, the surety may also ask for things like:

• A bank reference letter to confirm your banking relationship

• A resume or work history showing relevant experience

• A schedule of ongoing projects to show you’re not taking on too much

For smaller licence and permit bonds, they often only need limited information. But for larger or higher-risk contract bonds, these typically involve a more detailed review before they’re approved.

How to get surety bond insurance in Canada

The details can vary depending on the bond, but most businesses tend to follow the same general path when applying for a surety bond.

1. Confirm what bond(s) you need

You’ll need to know what type of bond is required, how much coverage is needed and who is asking for it. This is often sorted out over a short 10 to 15-minute discovery call, where you can go over the obligee’s requirements and any deadlines.

2. Submit your application and documents

Next, you’ll need to complete a bond application and provide the surety with any required supporting paperwork. This is usually done online through a secure portal.

3. Underwriting review and pricing

The surety will then review your application to decide whether to approve the bond and at what cost. Many bonds are reviewed within 24 to 72 hours, though larger or more complex requests may take longer. You should then receive a quote outlining the premium and terms.

4. Receiving your bond

Once you accept the quote and make payment, you’ll receive your bond. Depending on what the obligee wants, it may be delivered electronically through e-bonding or issued on paper.

What can slow down an approval?

Most surety bond applications move quickly, but there’s always the possibility of a delay. The most common reasons include:

• Missing or incomplete paperwork

• Unclear bond requirements or last-minute changes from the obligee

• Requests for additional financial information during underwriting

Applications for larger or first-time contract bonds may also take longer, especially if the surety needs more time to review your experience or financials.

How does a surety bond claim work?

A surety bond claim usually starts when the obligee believes the bonded obligation hasn’t been met.

Claim

When an issue cannot be resolved, the obligee may file a formal claim with the surety, which notifies the surety that the bond’s terms may have been breached and triggers the claims process.

Once a claim is filed, the surety is required to review it. The surety would then contact the principal to request information related to the allegation. Most surety bond claims are often triggered by:

• A contractor failing to complete work as agreed

• A business not meeting contractual obligations

• Non-compliance with licence or regulatory conditions

Review

When a claim is submitted, the surety begins an investigation, which typically includes:

• Reviewing the bond terms and related contract or regulation

• Requesting documents and explanations from all parties

• Confirming whether the claim meets the bond’s conditions

During the review, the principal will be expected to cooperate and offer up any records or explanations that may help to resolve any disputes. If the surety decides that the claim is valid, they may pay the obligee up to the bond’s limit.

Outcome

Surety bonds include an indemnity agreement. This means that after a valid claim is paid, as the principal, you must repay the surety for any valid claim payments, along with any related costs. If the principal refuses to reimburse the surety after a valid claim is paid, the surety can then take steps to recover the money, such as:

• Demanding repayment under the terms of the indemnity agreement

• Using collateral, if any was provided upfront

• Pursuing legal action to recover the amount owed, plus costs and interest

Surety bond vs. letter of credit (LoC)

Some contracts may allow your business to provide either a surety bond or a letter of credit (LoC). While both can offer financial security to the party requiring it, they work in very different ways, such as:

Basically, surety bonds can serve as an alternative to a bank letter of credit, freeing up a business’s working capital or line of credit that could otherwise be used to run or grow your business.