SURETY BONDS

What is Surety

Surety is an arrangement whereby the performance of an obligation is guaranteed. A surety bond is a three party agreement whereby a surety (typically an insurance company, bank or similar financial institution) agrees to discharge the obligations of a principal (the insured or bonded party) to an obligee (the beneficiary under the bond) in the event that the principal is unable to fulfill its obligations.

There are two broad classifications of surety bonds: contract surety bonds which guarantee contractual obligations and are typically used by construction companies, suppliers and manufacturers; and commercial surety bonds (“miscellaneous” bonds) used to comply with government regulations, court orders and miscellaneous forms of financial guarantee. The construction industry is the major user of contract surety bonds and these bonds account for the majority of surety bond premium in Canada.

The use of contract bonds is driven by governments at all levels along with related public institutions which are required by regulation or statute to seek surety bonds in support of contracts entered into with private contractors. Typically surety bonds are required in support of the public tendering process whereby governments award contracts for construction or supply of materials and services.

Contract surety bonds are typically divided into two broad classes:

  1. Tender Bonds, Bid Bonds and Consents of Surety (“Agreements to Bond”)
  2. Final Bonds, Performance bonds, Labour and Material Payment Bonds (“Payment Bonds”), Maintenance Bonds

A surety bond is not a contract of insurance. It is not based on the “law of large numbers” whereby the losses of the “few” are spread among the “many”. In the event that a surety company is required to pay claims arising from a bond, the surety will require full reimbursement from the principal and, where the principal is a privately held corporation, from the individual shareholders as well.

The inherent nature of a surety bond coupled with rigorous underwriting procedures allows us to deliver loss ratios substantially lower than in most lines of insurance, while delivering strong client retention.

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A Sample of Bond’s we Provide

Bid Bond

A bid bond is issued as part of a supply bidding process by the contractor to the project owner, to provide guarantee, that the winning bidder will undertake the contract under the terms at which they bid. Sometimes a bid bond comes with an agreement to bond.

The bid bond assures and guarantees that should the bidder be successful, the bidder will execute the contract and provide the required surety bonds. In addition to a bid bond and/or as a substitute for a bid bond, some tenders may require a letter from the surety company consenting to provide performance bonding should the tenderer be successful in its bid.

Performance bond

A Performance Bond is a form of contract surety bond that guarantees that the bonded contractor will perform its obligations under the contract in accordance with the contract’s terms and conditions. Performance bonds are typically in the amount of 50% of the contract amount, It’s important to note that a Performance Bond is a companion document to the L&M payment bond  (see L&M tab) and the two should be executed together.  Like L&M bonds, owners typically ask for 50% of the contract amount, but can also be issued for 100% of the contract amount

A Consent of Surety

A Consent of Surety (also know as a Surety’s Consent or Agreement to Bond) is a document used during the bidding phase of a contract tender. It is often used in conjunction with a Bid Bond. It guarantees the owner of a project being tendered that a Surety company will issue the required bonds in the event a contractor is successful in its bid

These guaranteed bonds are referred to as “Final Bonds” and apply directly to the project in question. The types of bonds being guaranteed commonly include Performance Bonds and/or Labour & Material Payment Bonds.

Why buy this type of bond……..A Consent of Surety are generally required by the project owners for both private and municipal contracts. From the owners perspective, requesting a Consent of Surety will ensure that the contractors bidding on their project are able to provide the further required bonding if they’re successful on the contract tender.

Labour and material payment bond

Labour and Material Payment Bond guarantees that the bonded contractor will pay all claimants for goods and/or services supplied for the bonded project.  A claimant under a labour and material payment bond is a trade contractor or supplier who has a direct contract with the bonded contractor to supply goods or services to the bonded job.   It’s important to note that a L&M payment bond is a companion document to the Performance Bond (see performance bond tab) and the two should be executed together.  Like performance bonds, owners typically ask for 50% of the contract amount, but labour and material payment bonds can also be in the amount of 100%.  The surety can never be liable for more than the total amount of the bond.

Please note that the labour and material payment bond is for the protection of your customer and your subs and suppliers and does not discharge your company from its legal obligations under the contract.

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