Surety Bonds are a type of financial security, posted by a Surety Company, that can be used in lieu of cash, certified cheques, or letters of credit. A Surety Bond protects the Obligee against losses, up to the limit of the bond, that result from the Principal’s failure to perform its obligation or undertaking. Unlike insurance, a loss paid under a Surety Bond is fully recoverable from the Principal.
How Surety Bonds Work
Surety always involves three parties:
- Obligee: the party to whom the bond is payable in the event of a default (the Owner of the contract)
- Principal: the party on whose obligation is guaranteed (and who purchases the bond)
- Surety: the party that assumes the obligation if the principal cannot
The two most common forms of Surety are Contract Surety and Commercial Surety:
Contract Surety Bonds
The Obligee is protected against a Contractor’s inability to complete a job.
- Used primarily in the construction industry.
- Protects the Owner (Obligee) from financial loss in the event that the Contractor (Principal) fails to fulfill the terms and conditions of their contract.
- The Obligee is protected against a Contractor’s inability to complete a job.
Commercial Surety Bonds
- Satisfies the security requirements of public, legal and government entities and protect against financial risk.
- Guarantees that the business or individual will comply with all required legal obligations.
Contract Surety Bonds
Contract Bonds are used primarily in the construction industry. These bonds protect the Owner (Obligee) from financial loss in the event that the Contractor (Principal) fails to fulfil the terms and conditions of their contract. Contract Bonds require a Contract Surety Facility in place before individual Bond documents can be issued.
There are six commonly used Contract Surety Products, for use at various stages of the project:
| Request for Qualification Stage | Prequalification Letter |
| Tendering Stage | Bid Bond Consent of Surety Letter |
| After Contract Award | Performance Bond Labour & Material Payment Bond |
| After Substantial Completion | Maintenance Bond |
The most common types of projects secured by surety in the public sector are:
- Project security for construction contracts
- Performance security for service contracts (e.g. recycling, waste collection, snow removal)
- P3 Contracts (e.g. Hospitals)
When applying for a Contract Surety Facility, a surety company will do a full review of the Client/Principal, with a focus on the 3 “C’s” of credit:
Character: Does the client have a good track record, good references, and integrity?
Capacity: Does the client have sufficient cash flow to service the job and to weather any potential delays in payment?
Capital: Does the client have a strong net worth position?
Questions about contract surety bonds or bonding in general?
Contact Samantha Jones
Commercial Surety Bonds
Commercial Surety Bonds satisfy the security requirements of federal and/or provincial courts, government bodies, financial institutions, and private corporations, and protect against financial risk. These bonds guarantee that the business or individual will comply with all required legal obligations.
For a consumer, this means that Commercial Surety Bonds protect against fraud, misrepresentation, and compensation of monetary loss.
Commercial Surety Bonds can be used to guarantee performance of non-construction related contractual obligations. For example, companies that supply and install equipment can be required to maintain their equipment after installation and may be asked to furnish a commercial bond to guarantee the ongoing maintenance.
Commercial Surety Bonds do not require a Surety Facility in place before individual bonds can be issued.
The most commonly used Commercial Surety products:
- Customs & Excise Bonds
- License & Permit Bonds
- Court Bonds (Judicial Bonds and Fiduciary Bonds)
- Lost Document Bonds
Axis Insurance can help get you set up with the appropriate Customs Bond needed for the upcoming CARM Release 3 to continue with your Release Prior to Payment Privileges.
Learn More about CARM Release 3 (PDF) Get a Surety Bond QuoteShare post:
Samantha Jones
Account Executive, Construction & Real Estate, Surety
Hello, I’m Samantha Jones, an Account Executive specializing in Surety at Axis Insurance, where I’ve been part of the team since May 2019. My career in the insurance industry began in 2014, and over the years, I have honed my expertise in surety bonds, providing robust financial security and contract compliance solutions for our clients.
Would you like to apply for a Commercial Bond, or have any questions about Commercial Bonding in general? View my biography and get in touch.
