What is a surety bond?
A surety bond is a legally binding contractual agreement. The agreement is made between three parties: the principal, the obligee, and the surety. Essentially, surety bonds are promises made by the principal (the company) to the obligee (the company’s clients), through the surety company, that a task will be done following laws, regulations, and industry standards.
If a task is not completed legally, in accordance with industry standards, or in accordance with a set contract, the obligee must be compensated for the loss.
A more detailed look into each party involved with a surety bond can be found below.
The principal is the professional or company that purchases the surety bond as a financial guarantee that they will follow through with the required task. The task may or may not have a contract alongside it.
If it does have a contract, the document will specify what category of surety bond needs to be secured (in Canada, the two main categories of surety bonds are commercial surety bonds and contract surety bonds).
The surety is the surety company that underwrites the bond. This company not only issues and backs the bond on behalf of the principal but also guarantees compensations to the obligee in the event that the obligee files a claim against the principal (a claim could be made alleging fraud, illegal practices, or failure to follow the terms laid out in the contract).
If a valid claim is brought against the principal, the surety company provides the guaranteed funds to the obligee. From there, the principal must agree to a payment plan with the surety company to repay them for the funds sent to the obligee. In sum the surety company provides the principal with a line of credit.
Lastly, the obligee is the party protected by the surety bond. Obligees can be everything from investors and clients to project owners and government entities.
Contract vs. commercial surety bonds
The two main categories of surety bonds in Canada are contract surety bonds and commercial surety bonds. Contract surety bonds are most commonly used in the construction industry, as a guarantee between contractors and construction firms.
The bonds are used to ensure that the terms of the contract for a specific project are met. Meanwhile, commercial surety bonds are used to ensure that a professional or business complies with the legal regulations associated with a certain task or project.
Surety bonds come in handy in the event that a claim of dishonesty, fraud, or straying beyond legal bounds is brought against the company.
Examples of contract surety bonds are performance bonds and payment bonds, while examples of commercial surety bonds are fidelity bonds (first-party bonds and third-party bonds), license and permit bonds, and miscellaneous bonds.
What is surety bond insurance?
Assured bond insurance, sometimes referred to as surety bond insurance, is a type of financial guarantee that protects your business from losses if you are unable to fulfill your contractual obligations.
Therefore, surety bond insurance is designed to protect your customers, providing them with added peace of mind knowing they will receive their money back if the terms of the contract are not met.
Therefore, surety bonds have advantages for the customer, but they also benefit the business. Being bonded instantly boosts a company’s credibility, trust, reliability, and transparency. It lets your clients know that you are following all laws and regulations pertaining to your area of operations and shows that you are dedicated to providing quality work and superior customer service.
In addition, assured bond insurance protects your business from financial ruin in the event that a dissatisfied customer brings a claim against you. With surety bond insurance, settlement fees, court fees, and all other legal fees would be paid out from the bond, protecting your company from financial loss.
Does my company need surety bonds?
Some industries in Canada require that companies purchase surety bonds, so it’s important to research the rules and regulations surrounding surety bonds in your industry. However, even if surety bonds are not legally required, unforeseen circumstances happen all the time.
The best way to protect yourself against the financial losses that come with an inability to fulfill contract obligations is with surety bond insurance.
From a natural disaster to an economic recession to a global pandemic, there are all kinds of unexpected events that can impact your company’s profit margins. Should an incident negatively affect your operations, you may be unable to pay suppliers or continue production.
In such a situation, your business needs surety bonds to be able to fulfill any remaining obligations.
How is a surety bond enforced?
Now that you know a bit more about what assured bond insurance is, you might be wondering how surety bonds are enforced. The answer to this question is that surety bonds are enforced by surety companies.
As mentioned, a surety bond works like a line of credit. If you are unable to fulfill your obligations to a supplier or customer, the surety company will step in and provide the necessary funds. In turn, your business will agree to a payment plan with the surety company to repay them in a reasonable amount of time.
Who could benefit from surety bond insurance?
Any business in Canada that provides products or services to customers can benefit from surety bond insurance. Think of surety bond insurance as a safe, secure alternative to a letter of credit. It guarantees the financial stability of businesses in a wide range of industries, from construction and telecommunications to transportation, energy, and more.
Further, surety bond insurance can cover several types of bonds, including but not limited to contract, bid, performance or labour and material payment, supply, license and permit, and judicial bonds.
Get in touch with BrokerLink to learn more about assured bond insurance and request a free surety bond insurance quote
Do you still have questions about assured bond insurance?
BrokerLink is dedicated to providing professionals, contractors, and businesses all over Canada with the protection they need in the form of surety bond insurance. Whether you have questions about how surety bond insurance works, how it can protect you, or whether it suits your industry, we can answer them.
BrokerLink has been in business for over 30 years, which means our insurance advisors are experts in all types of insurance, including assured bond insurance. Let us help you protect your important relationship with your clients or customers.
When you get in touch with BrokerLink, you will be assigned a dedicated insurance advisor who will take the time to understand your business needs and obligations. From there, we will compare assured bond insurance quotes on your behalf and find an insurance policy that has the level of protection you desire.
To learn more about surety bond insurance or obtain a free assured bond insurance quote, get in touch with BrokerLink today. We can be reached by phone, email, or in person at one of our many locations across Canada. You can also request a free quote online using our online quote tool. All BrokerLink quotes are accurate, competitive, and obligation-free.
Learn more about surety bond insurance by contacting BrokerLink today. We look forward to hearing from you!
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