A surety bond is a legally binding contractual agreement among three parties: the principal, the obligee, and the surety. One way to look at surety bonds is that it is a promise made to the obligee (e.g. project owners) by the principal (e.g. contractor) through the surety company that a task will be done in accordance with legalities and industrial standards.
If a task is not done: (1) legally, (2) in accordance with industry standards, and/or (3) in accordance with a set contract, the obligee is guaranteed indemnification or compensation for any sustained loss. In short, surety bonds are there to give a guarantee to obligees. In some industries, surety bonds are required by government regulations.
To ensure that you get a customized surety bond for your business, we, at KASE Insurance can help. We are a leading provider of insurance and surety bonds. Through our years of service, we have worked with all kinds of businesses from various industries. We know the ins and outs regarding all kinds of surety bonds and we can get you exactly what you need!
It’s important to understand that surety bonds don’t always work alongside a contract. In Canada (as well as many other parts of the world), there are two main categories of surety bonds: commercial surety bonds and contract surety bonds. Within these two categories, there are also subtypes to consider. In this article, we will tell you all you need to know regarding types of surety bonding insurance while also covering the fundamentals.
Let’s get started!
How Surety Bonds Work
As mentioned earlier, surety bonds are like promises or guarantees that a task will be completed in line with laws, regulations, and the terms of a set contract. In order to fully understand how these legally binding agreements work, one must be familiar with the three key players in a surety bond: the principal, the surety, and the obligee.
This is the professional or business that purchases the bond as a financial guarantee that they can follow through with the task required of them. The task may or may not have a contract in place – and this signifies what category of surety bond needs to be secured (whether it’s a commercial or contract surety bond).
The surety is the underwriter of the surety bond. This company issues and backs the bond for the principal. They also guarantee indemnification or compensation to the obligee if a claim is made (e.g. illegal practices, fraud, not following the terms of a pertinent contract).
In the event that a valid surety bond claim is made against the principal, the surety company will provide guaranteed funds to the obligee – an amount which the principal will then pay off to the surety depending on agreed payment terms. In a way, the surety company provides a line of credit to the principal.
This party is protected by the surety bond and in many cases also requires the principal to purchase the bond. An obligee can be an investor, client, or project owner. The obligee can also be a government entity that seeks to protect consumers from fraud and malpractice.
Contract Surety Bonds vs. Commercial Surety Bonds
Contract surety bonds are typically found in the construction industry, wherein contractors or construction firms are the principal. These surety bonds are there to ensure that the terms of the contract for a certain project are met.
Meanwhile, the purpose of commercial surety bonds is to ensure that a professional or business complies with legal regulations in fulfilling a task or job. These professionals and businesses can be claimed against should they exhibit dishonesty or stray beyond legal bounds.
Main Types of Contract Surety Bonds
A performance bond is a contract surety bond that guarantees the completion of a construction/renovation project. This bond ensures that the contractor (the principal) will complete the task in accordance with legal regulations and the terms of the contract. In this type of surety bond, the obligee can be a municipality, governing body, or private owner/investor of a project.
A payment bond is a kind of contract surety bond set between contractors (the principal) and subcontractors/suppliers (the obligee). This bond ensures that the subcontractors or suppliers will get paid (for their work or materials, respectively) upon the project’s completion or at an agreed upon date.
Main Types of Commercial Surety Bonds
License and Permit Bonds
These are surety bonds that are required by federal, provincial, and municipal governments to ensure that certain businesses are complying with regulations in relation to required permits and licenses. License and permit bonds are often required from businesses that can potentially pose more risk to consumers in the form of incompetence, fraud, physical damage, and malpractice.
License and permit bonds are typically required from principals like contractors, private investigators, travel agencies, collection agencies, auto dealers, liquor retailers, investment advisors, notaries, and so on.
Though fidelity bonds are not typically required by the government for any specific industry, this type of surety bond can provide protection for many kinds of employers (the obligee) against monetary and physical losses, caused by fraudulent/dishonest actions by the employees (the principal).
This type of surety bond is most commonly held by banks, brokerage firms, and insurance companies.
Miscellaneous bonds refer to commercial surety bonds for other specific purposes. These are typically held by private businesses or relationships to provide a special kind of guarantee. One example is for guaranteeing monthly rent payments to a landlord (the obligee) from a tenant (the principal) for a commercial space.
Since these are not as common or fixed as the other two commercial bonds mentioned above, they can be more challenging to provide.
Surety Bonding Insurance That You Can Count On
In this article, we talked about the main categories and subtypes of surety bonds needed by businesses. Now that you know about these, along with the fundamentals of how surety bonds work, you are better equipped to find the right type of surety bond for your business.
As an insurance and surety bonds broker, KASE Insurance can provide you with the best options and the utmost transparency about each one. We’ve been in business for numerous years and along the way, we’ve garnered awards and helped hundreds of businesses. With KASE, you can be sure that you are in good hands.