What is a Surety Bond? Surety Bond Definition & Other FAQs
Whether you’re a new business or one that’s been around for a while, you may have heard the term “surety bond.” Many clients, including government, will request or require you to obtain a surety bond in order to conduct business.
Some Canadian provinces may even have mandates surrounding certain lines of work that require you to obtain a surety bond before any work can be done. Unfortunately, especially for newer businesses, surety bonds are not common knowledge and can be confusing.
If you were wondering, “couldn’t I just buy insurance instead?” – The answer is almost always no. Bonds are not the same thing as insurance, although they sound similar in essence. Insurance is risk transfer, but surety bonds act as risk mitigation between three parties. Insurance should still be purchased to protect your business, but it won’t replace surety bonds and clients may require them.
To help break it down, CCV insurance has compiled some frequently asked questions and answered them for you to view. See below.
What is a surety bond?
A surety bond, or surety bond insurance, is very similar to insurance in that it’s an agreement used to protect a specific entity’s assets. However, with surety bonds, the agreement is between three parties: the surety, the obligee, and the principal. In layman’s terms, the surety is the bonding company/provider, the obligee is the owner of the property being worked on or constructed, and the principal is the contractor doing the work. Where insurance will generally protect the business owner, surety bond is insurance for the client. There are multiple different types of surety bonds, including:
- Performance bonds
- Labour and material bonds
- Bid bonds
- Maintenance bonds
If you aren’t sure what type of bond you need, discuss with CCV Insurance & Financial.
How do you pay for a surety bond?
CCV helps you pay for surety bonds once you have figured out the type of bond you need and the amount. You will also be required to get all your information that you need beforehand in order to ascertain that everything is in order. In Canada, that might mean including info like your license number, business name, ownership info, etc. Almost all surety providers will require the full upfront payment before they can issue a bond, but some companies may offer the chance to do financing for higher-risk principals that may have lower credit scores.
How do you apply for a surety bond?
You can start getting a surety bond CCV Insurance by applying for a quote. We can help break down the five simple steps to applying for a surety bond. You will first need to determine the amount and type of bond. We can help you with this. You may already be aware that there are several types of bonds. In addition, you’ll need to determine amount. Your overall cost will be between 1-3% or even 5% of the total bond amount, whether that’s for $100,000 or just $10,000.
How long do surety bonds last?
It depends on the surety bond and the exact terms under your agreement, but most bonds will expire around a year after the date of being issued. Take this answer with a grain of salt as not all surety bond agreements have the same duration. Some payment bonds may last up to two years, and other types of surety bonds can last even longer. Moreover, some bonds have the option to be renewed, whereas others will be classed as “non-renewable.” It largely depends on the bond you are dealing with.
What does it mean to be “bonded?”
Companies that are considered “bonded” have been deemed as trustworthy by the underwriting service/i.e, surety bond issuer. This is attractive to potential clients as it shows you have the ability to recoup if there is a loss and work is guaranteed. Note that the Canadian government will set forth certain requirements and regulations for contractors, subcontractors, and companies, depending on the type of work being done and the industry. There may be criminal background checks, credit history checks, and so on. The bond applicant must provide the issuing company with all the required data to verify their creditworthiness and other stats.
CCV Insurance strives to provide our clients with a level of service that cannot be matched by other Ontario business insurance providers. With over 40 years of experience in the insurance brokerage world, we are confident we can help you find surety bond solutions and work closely with your business to ensure that you get the right type of Ontario surety bond. This ensures that you and your client will get the peace of mind they deserve. Get a free quote with us today or see more about our surety bond insurance offerings.