The Ultimate Guide to Surety Bonds in Canada

If you’re new to the world of surety bonds or are looking to expand your knowledge on this subject, you’ve come to the right place. In this comprehensive guide, we will demystify the concept of surety bonds, explore their significance, and provide you with a clear understanding of how they work within the Canadian context.

Surety bonds play a crucial role in various industries and sectors across Canada, providing assurance and financial protection to businesses, individuals, and government entities. Whether you’re a contractor bidding on a construction project, a supplier providing goods or services, or a professional seeking to fulfill licensing requirements, understanding surety bonds is essential to navigating the Canadian business landscape.

Even if you have no prior knowledge of surety bonds, fear not! This guide is designed to break down complex concepts into easy-to-understand explanations. Throughout this page, we will answer some key questions so that you will be better prepared to make informed decisions when it comes to obtaining surety bonds for your business.

Table of contents:

What is a surety bond graphic illustration

What is a Surety Bond?

Surety bonds are a legally-binding agreement that involves three parties:

  • The principal: The party that purchases the bond as a guarantee that they’ll finish the project or task set by the obligee
  • The obligee: The party that requires the principal to obtain a surety bond
  • The surety: The party that guarantees the work of the principal to the obligee and assumes the obligation if the principal cannot

Simply put, these bonds act as a promise made by the principal, through its surety company, that a contract will be carried out legally and in accordance with industry standards.

It also has two main categories: contract and commercial bonds.

Contract bonds are mainly used by contractors or other professionals working in the construction industry. These bonds ensure the terms of a project will be met by its deadline. Commercial bonds, on the other hand, ensure a company owner and their business comply with licensing requirements while completing a project.

Unfortunately, projects can and do fall through—with serious financial losses. Having a surety bond secures your finances in case a contract is breached or your business is fined for not having the appropriate license to continue your operations.

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Types of Surety Bonds in Construction

There are many types of surety bonds for construction contracts. Understanding their differences will ensure your business’s risks are adequately covered.

Contract Bonds

When a contractor is awarded a construction project, they are typically required to provide a contract bond as a condition of the agreement. This type of construction surety bond guarantees that contractors will successfully fulfill the terms of a contract within the set deadline and ensures proper employee compensation.

Bid Bonds

A bid surety bond acts as financial protection to the project owner (obligee) in the event that the winning bidder (principal) fails to proceed with the contract or declines the awarded project after winning the bid. A bid bond represents a specific percentage of the bid amount, commonly between 5% and 10% of the total bid value.

a surety bond insurance broker shakes hands with a contractor

Payment Bonds

A payment surety bond guarantees that contractors, subcontractors, suppliers, or other employees involved in the project will receive payment in full for all the work they’ve done or materials they’ve provided.

Performance Bonds

Another type of construction surety bond is the performance bond. This subtype guarantees that a contractor will finish the job legally—in accordance with industry standards—and within the agreed-upon deadline and budget.

Maintenance Bonds

This type of construction surety bond acts as an assurance that the quality of work that goes into the project will stand the test of time. It is commonly used to ensure that the contractor (principal) remains responsible for any necessary repairs or maintenance during the agreed-upon warranty period.

Supply Bonds

This surety bond ensures that a supplier will produce the necessary supplies or materials needed for the project, as specified by the contract. Supply bonds also protect against any supply shortage or loss of materials for the duration of the project.

Types of Commercial Surety Bonds

Commercial surety bonds are designed to protect the public’s interests. This subtype ensures businesses have the correct license to start working on a project and that they follow all the required codes, rules, and regulations. 

Fiduciary Bonds

This surety bond subtype is a court bond that guarantees a fiduciary will fulfill their court-appointed duties. Fiduciary bonds also protect your finances against cases of fraud, embezzlement, or any type of dishonest activity.

License and Permit Bonds

These types of bonds guarantee that a project will be fulfilled in accordance with local building codes or other laws and regulations in the province or territory. 

Commercial Contract Bonds

With these bonds, the surety must guarantee to the obligee that the principal will perform their obligations as stated in the contract. Essentially, commercial contract bonds ensure that the project will continue even if the principal fails to meet their duties.

Miscellaneous Bonds

This special type of surety insurance is used to represent a variety of surety obligations that aren’t easy or can’t fit into one category. However, miscellaneous commercial bonds support the needs of both private enterprises and government entities.

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Industries That Require Surety Bonds

Construction Surety Bonds

Construction surety bonds protect against business interruptions or financial obligations caused by a contractor’s failure to complete a task or project. Being one of the country’s largest sectors, the construction industry carries a lot of risks for all parties. 

While that may seem daunting, construction surety bonds assure project owners that construction projects will be fulfilled regardless of whether one party defaults or fails to meet the contract’s specifications.

Developer Surety Bonds

Both real estate developers and landowners are constantly exposed to various risks when investing in property development. Luckily, developer bonds can provide financial protection, assurance, and credibility to developers as well as other stakeholders involved in the project during the construction process.

Developer bonds can be customized to include improvements made to public buildings, drainage systems, sewers, sidewalks, or any other public work that needs to be completed. The developer must purchase the bond to assure the obligee that they will be compensated if the project isn’t fulfilled within the given deadline.

Freight Broker Surety Bonds

Logistics and transportation companies often face hazards due to the complex nature of the industry. Because this is a highly competitive market in a risky environment, freight surety bonds help establish freight broker credibility and prevent fraud. They also ensure that carriers or shippers receive payment for their services in a timely manner.

This type of surety bond is needed by freight brokers to renew or obtain their licenses. 

Two freight workers planning a logistics job

Auto Dealer Bonds

Auto dealer bonds are needed in the automotive industry because they protect the public from financial losses caused by fraud, unethical business practices, or violations of licensing laws committed by auto dealers. Buying a car is a big investment, after all.

In order to operate legally, car dealerships must have an auto dealer bond in order to comply with industry standards. However, the requirements vary depending on the kinds of vehicles and the location of the dealership. 

License and Permit Bonds

License and permit bonds are mandatory requirements for businesses in Canada. Their purpose is to assure the public that a vendor, supplier, or business is trustworthy. 

Although each bond is unique to each industry, its goal remains the same: protect consumers from financial losses or potential damages. These also offer security to government entities from fraudulent business practices.

These bonds are also required in every province or territory because it ensures the business complies with the codes, rules, and regulations outlined by the law.

Professional Services

Most industries require bonds before starting a project. Not only do they protect against financial obligations, but they also guarantee that a business is operating in compliance with the law. This type of bond proves that the business is qualified and has adequate finances to fulfill the stipulations required by the project.

In estate planning, for instance, bonds are needed to ensure the executor of an estate will fulfill their legal duties and obligations per the relevant laws. Estate bonds are also required by the court to ensure the executor of the deceased persons’ estates are duly accounted for and distributed to the rightful beneficiaries.

Healthcare Industry

Bonds are needed in the healthcare industry to provide assurances that healthcare organizations will meet their obligations accordingly. Much like other types of bonds, surety bonds designed for healthcare agencies, aged care residences, and other service providers need to guarantee to their clients that their business complies with industry standards.

Healthcare bonds also guarantee the safety and rights of patients against fraudulent or unethical business practices.

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Surety Bonds vs. Insurance

Both surety bonds and insurance are written agreements that provide financial protection. However, there are key differences between the two.

Insurance is an agreement between the person or the business (known as the policyholder) and their insurance provider. The insurance company covers the policyholder against future losses or damages in the event of covered risks, such as accidents, theft, property damage, or liability claims. Insurance policies are typically proactive in nature, aiming to mitigate potential losses or damages.

On the other hand, a surety bond is a form of risk management that guarantees the performance of a specific obligation. They are designed to ensure that a party fulfills their contractual or legal obligations. Surety bonds are reactive in nature, addressing specific obligations or risks.

Some other differences between insurance and surety bonds include:

    • Parties involved: While insurance coverage protects either the business or the individual, bonds protect the obligee (the party who contracted the principal to work on the project).
    • Risk transfer: Insurance transfers the risk from the insured to the insurer while surety bonds do not transfer risk; instead, they provide a financial guarantee to the obligee that the principal will fulfill their obligations
    • Coverage scope: Insurance policies cover a wide range of risks; bonds are specific to certain obligations or contractual requirements.

    an underwriter calculates the cost of a surety bond for a contractor

    How Surety Bonds Work (+ Claim Examples)

    Surety bonds are usually required for contractors who’d like to bid and work on expensive contracts. Even when it’s not a requirement, bonds help businesses compete for these contracts to prove their financial wherewithal.

    Here are some hypothetical examples of surety bond claims:

    Example #1:

    • Problem Icon

      Your company gets hired by a local government agency to build a road. The government agency wants assurance that work will be completed within a set deadline and in compliance with local codes and laws. You couldn’t fulfill your obligations by the time the deadline ended so a claim is then made against your bond.

    • Outcome Icon

      Your bond will compensate the client. After that, you can work out a manageable payment plan with your surety bond insurance provider.

    Example #2:

    • Problem Icon

      Your company was not able to pay your vendor due to a problem in your business’s finances. The vendor makes a claim against your payment bond.

    • Outcome Icon

      If no resolution has been made during the negotiation and settlement, the bond company will provide the compensation. After that, you can repay the bond company following your set payment plan.

    Example #3:

    • Problem Icon

      One of your employees embezzled money from your business, costing you thousands of dollars in financial losses. You file a claim against your previous employee’s fiduciary bond.

    • Outcome Icon

      The bond provider will provide compensation for the lost money.

    6 Steps to Qualify for a Surety Bond in Canada

    In Canada, surety bonds are typically issued by surety bond insurance providers, but they can also be issued by companies or other entities with the proper license. These are usually insurance companies, surety companies, and surety bond brokers.

    Although there are many types of surety bonds, the process of qualifying for one is universal. Here is how you can qualify for a bond in Canada:

    1. Determine the Bond Type

    Before you can qualify for a surety bond, you must first check the requirements specific to the kind of bond you need. Understanding your specific needs will also help streamline the qualification process.

    2. Find a Reliable Surety Bond Insurance Provider

    Your choice of surety provider is important. Check the insurer’s history, how long they’ve been in business, the services they provide, their accolades, and any customer reviews. Choose an insurance company with brokers who are experienced in issuing surety bonds.

    3. Gather Required Documentation

    When filing an application, you will be required to provide proof of your company’s financials. This can include a balance sheet, income statement, retained earnings statement, and cash flow statements. They may also require references, work history, resumes, and other relevant records. Prepare these documents in advance to facilitate the application process.

    4. Assess Financial Strength

    Surety bonds involve a financial risk for the provider, so they will assess the financial strength of the applicant. This evaluation typically includes analyzing financial statements, credit history, cash flow, and overall business stability. Demonstrating a healthy financial standing increases your chances of qualifying for a surety bond.

    5. Submit Additional Documents

    Additional documentation might be necessary if your business is in poor financial standing. In cases like this, your agent might ask you to provide a promissory note that states you’ll be responsible for your company’s financial obligations.

    Sometimes proof of assets, a certificate of insurance, or collateral are required as signs of good faith. Though this would depend on each case, expect that some surety brokers will require you to provide some or all of these documents.

    6. Provide Detailed Project Information

    When applying for a surety bond related to a specific project, provide comprehensive details about the project, such as scope, duration, estimated costs, and key stakeholders involved. This information helps the surety bond insurance provider assess the associated risks and determine your eligibility.

    6 steps to qualify for a surety bond in Canada graphic illustration

    How Much Does a Surety Bond Cost in Canada?

    The cost of a surety bond is influenced by several factors and is determined through a careful evaluation of various aspects related to the bond and the applicant. In its simplest form, the cost of a surety bond is a percentage of the total amount of your bond, which can average between 1% to 15% of the bond cost. For instance, if you need a $10,000 surety bond, you’ll pay anywhere from $100 to $1,500. 

    Some common factors considered when determining the cost of a surety bond include: 

    • The bond amount (also known as the penal sum);
    • The applicant’s financial strength;
    • The project size and complexity;
    • The bond type and risk level;
    • An applicant’s industry experience and track record;
    • The duration of the bond; and
    • The surety provider’s evaluation.

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    Understanding the Surety Bond Claims Process

    In addition to knowing how to qualify for a bond, you should also understand how the claiming process works. This is an integral part of the three-way agreement you’re entering and helps you avoid violations or misdeeds.

    How to Make a Surety Bond Claim

    Your surety bond provider must have sufficient knowledge and experience so they can quickly help you investigate the matter efficiently or help resolve the claim. 

    If an obligee wants to have the claim accepted, they must first provide all the necessary documents and evidence to the surety who provided the bond. After that, the surety must thoroughly investigate by contacting both parties. 

    If the claim is denied, the surety will only notify the obligee about the decision. If the claim is approved, it notifies the principal to give them a chance to resolve, defend, or satisfy the claim. If the principal fails to do so, the surety will cover the financial obligations, and then the principal will repay the surety later on. 

    How to Prevent Surety Bond Claims

    If you want to avoid a claim, ensure that you understand the bond agreement and that you can fulfill the obligations assigned to you. Stay honest and fair to the clients you’re working with, and ensure your employees are following industry standards and the contract’s stipulations.

    a seesaw representing risk management

    Work with Expert Surety Bond Brokers at KASE Insurance

    KASE Insurance is one of the top insurance and surety bond providers in Canada. We specialize in both contractors and commercial insurance, ensuring that our clients get the best possible plans for their company’s needs. 

    We pride ourselves on providing the best customer service and personalized solutions for all of our clients. Whether you work in construction, healthcare, or anything in between, we’ll make sure the application process is as smooth as possible in order to provide you with the right bond at a fair and competitive rate. 

    We’re also here to help walk you through the process if a claim is filed against you. As a proud sponsor of the Canadian International Freight Forwarders Association (CIFFA), you can rest assured that we’ll be in your corner every step of the way. Our commitment to servicing and protecting Canada’s trade industry with comprehensive insurance and surety bond solutions is unmatched.

    Contact us today for a quote to get started! 

    Common Surety Bond Questions

    The type of surety bond you need will depend on the specific details of the contract. The obligee will provide these details for you, including the bond amount and any other requirements they might impose.

    The bond is written to protect or provide assurances to obligees, employees, suppliers, or other third parties. If one of these entities encounters financial damage, they could file a claim against the bond.

    It’s important to note that while surety bonds provide protection, they do not absolve the bonded party from their obligations. The bond serves as a financial guarantee to compensate the affected parties in case of non-performance, breach of contract, or other specified circumstances. Ultimately, a surety bond aims to safeguard the interests of the various parties involved in a contractual agreement or project.

    Underwriters will typically look at the principal’s personal or financial statements—such as credit scores or loan records—or any other documentation that might suggest they have a risk of defaulting. Their involvement in the application process will determine the overall risk profile of the applicant and determine the terms, conditions, and pricing for the surety bond.

    Obtaining a bond is typically a quick process for many applicants. Some bond providers use online forms that only take a couple of minutes to complete, provided they are ready to provide all the necessary information needed for the bond requirements.

    A cash bond only involves two parties. It’s mainly used to bail someone out of jail to ensure the defendant shows up to their court date.

    A surety bond is a three-party agreement between the principal, the obligee, and the surety to ensure that a project or task will be completed to the standards stipulated in the terms and conditions.

    One of the disadvantages of a bond is that they have limited coverage and limitations. If issues or losses occur that are outside the scope of the bond’s coverage, the bonded party may not receive financial protection or compensation. This is where a comprehensive insurance policy is needed to provide proper coverage to avoid any unexpected gaps.

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