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⊸ Business Insurance⊸ Surety Bond

Find the best surety bond rates

There are times in business when a surety bond is required to secure a contract. Business is built on trust, and often, you’ll need more than their word and a handshake to win a contract. You have to provide clients with a guarantee and reassurance. Surety bonds can provide this guarantee. They prove you are legitimate and committed to meeting your obligations to customers, suppliers, and partners.

At ThinkInsure, we’ll help you find the proper surety bond and help you thrive. We are partners with the top insurers in Canada, so we can compare the best quotes and options for you.

What you need to know about surety bonds

  • Being bonded provides your business with credibility and gives reassurance to your customers.
  • Companies often require surety bonds to secure contracts. They provide a financial safety net and guarantee of quality to customers and clients.
  • Surety bond costs are based on a percentage of the bond.

What is a surety bond?

A surety bond protects your clients and suppliers against loss if you fail to meet defined obligations. You have coverage for loss up to the limit of the bond. Losses paid are fully recoverable from you.

The two most common forms are commercial and contract surety. They can also be known as a contractors bond or construction bond. Some providers require businesses to secure a surety bond as part of the contract.

A surety provides your clients and partners with additional protection and reassurance.

Surety bonds are overseen by the Surety Association of Canada (SAC) They are the national trade advocacy association in Canada representing the interests of the surety industry.

How is a surety bond different from insurance?

Surety Bonds are a three-party agreement involving the principal (contractor), obligee (project owner), and surety company (insurance brokerage). They are required in various industries or projects to guarantee compliance, completion, or payment. So, they provide financial security and assurance, ensuring that companies fulfill their contractual obligations.

Business insurance is an agreement between your company and insurance provider. Insurance protects against potential risks, such as damage, loss, liability, or illness.

Overall, surety bonds are specifically designed to ensure a company’s performance and financial obligations, while insurance protects against a wider range of risks and liabilities.

What is the purpose of a surety bond?

two colleagues traders talking to each other

Surety bonds serve an important purpose in business. They act as a financial safety net and a guarantee of quality to customers and clients. They ensure a company will fulfill their contractual obligations, including timely completion of work and payment to all parties involved.

There are several reasons why bond insurance may be ideal for your company :

  • Credibility : Being a bonded company adds to your credibility.
  • Reassurance : It tells your customers, partners, and everyone else that you will complete work as stated.
  • Show you are legitimate : Being bonded is a trust factor and shows others you are legitimate.
  • Competitive advantage : Being bonded will give you an edge over those without bonding. Customers are more willing to work with you if you are bonded.

Do I legally require a surety bond?

By law, some organizations in Ontario and Canada must purchase surety bonding insurance due to the nature of their operations or industry. Make sure you are aware of your licencing and bonding requirements. Others purchase bonds to increase company credibility.

What industries commonly use surety bonds?

Bonds are available and used by many companies. Here are the industries where this is most common :

  • Contractors
  • Construction
  • Transportation
  • Logistics
  • Manufacturing
  • Resources
  • Auto dealers
  • Real estate
  • Retail and wholesale
  • Import, export
  • Finance, law
  • Many more

How do surety bonds work?

Surety bonds have several moving parts. The process to get a surety bond involves three parties - the obligee, principal, and surety:

  • Obligee (your client or business partner) : The bond is payable to them if you fail to meet obligations.
  • Principal (your business) : You need to complete defined activities for your clients.
  • Surety (your insurer) : They assume the obligation if you cannot. They pay your client if you default on your obligations.

Surety bonds provide financial protection for obligees by ensuring that they will be compensated for damages or losses incurred due to the principal's failure to perform as agreed.

If the principal (contractor) fails to fulfill the terms of the contract with the obligee (project owner), the obligee has the right to file a claim against the surety bond.

The obligee submits a claim to the surety company, providing evidence of the principal's default. The surety company investigates the claim to determine its validity.

If the claim is valid, the surety company will pay the obligee compensation up to the limit of the bond amount.

The surety company will then seek reimbursement from the principal for any claims paid. The principal is obligated to repay the surety company for the total amount of the claim.

How do I get a surety bond in Canada?

Getting a bond is like shopping for insurance. Follow these steps :

  • Determine bond requirements: Research requirements for your business, industry, and obligee. They vary based on your location, type of business, and other factors. You’ll be required to provide financial documents to prove you have the resources to fulfill the surety bond terms.
  • Find providers: Working with a commercial insurance broker will give you access to more bonding options and providers.
  • Get a quote: Review options to determine the bonding options available to you.
  • Review quotes and choose a bonding company: Choose a bond that meets your business and financial requirements.
  • Sign the bond issuance agreement and pay: Sign up for the bond and select a payment method. Then, deliver the bond to the obligee.

What are the requirements to get a surety bond?

There are specific requirements you’ll need to meet to qualify for a surety bond. You will need to provide financial information. The amount of information required will depend on the size of the bond. Here are the typical requirements companies need to provide:

  • Year-end financial statements
  • Financial statements of the business owner
  • A bank letter of reference
  • Completion of a questionnaire outlining your industry experience and the type of work you do

What is the average cost of a surety bond?

Surety bond costs are variable. Insurers base the amount on your level of risk of not meeting your obligations. They also consider the amount you need and the odds of you filing a claim. The amount is set as a percentage of the total cost of the bond.

The average amount of a bond can be from 1% to 15% of the bond cost. For example, if you have a $10,000 bond, you will pay anywhere from $100 (1%) to $1,500 (15%) for coverage. The percentage you pay is based on your financial stability and risk factors. You pay less when you are seen as less risky by insurers and have a higher credit rating.

An example of surety bonds in Canada

You are a contractor and want to secure a project with a local builder.

To bid for the project, you require a $50,000 surety bond. If you are approved for the bond with a 5% bond premium, you would pay $2,500 for the bond.

What are the types of surety bonds?

two financial advisor analyst discussing at office meeting

Companies can purchase many different types of bonds. The most common are contract surety, commercial, and fidelity bonds.

Contract surety bonds

This ensures that if you do not meet contract obligations, your client gets compensation. For example, you do not complete a project as promised. The bond is paid to your client so they can find another party to complete the work. This is common in construction and contracting.

Bonds are available for :

  • Bids
  • Maintenance and supply
  • Performance
  • Lost securities
  • Labour and material payments

Commercial surety bonds

This ensures entities have protection against financial loss. They guarantee a business will meet all required legal obligations.

Bonds are available for :

  • Fiduciary
  • Licenses and permits (Government may require this before you can operate)
  • Canadian customs and excise
  • Lost documents

Fidelity bonds

Fidelity bonds protect you against employee dishonesty. It protects you from losses because of employee actions such as theft, damage, and other actions.

Other types of bonds

Here’s a list of other bond products available to businesses in Canada:

  • Supply bonds
  • Maintenance bonds
  • Performance bonds
  • Permit bonds
  • Licence bonds
  • Developer surety bonds
  • Freight broker bonds
  • Estate bonds
  • Healthcare bonds

Surety Bond FAQs

It is common to see businesses list “bonded and insured” on their website and in ads. Companies that are bonded and insured have a license. They have commercial insurance coverage and have secured a surety bond. If they fail to meet project expectations, you, as the client, have coverage for a financial loss.

Surety bonding insurance provides an added layer of protection against internal threats. It protects your business against :

  • Internal fraud: Intentional or unintentional fraud activities by your employees.
  • Theft: Employee theft while at a customer’s location.
  • Incompetence: Dishonest actions by your employees.

Bonds guarantee to your client that you will fulfill the contract. You will meet all terms and conditions.

You may require a licence bond before the government will allow you to operate your business. These bonds ensure your company will comply with all laws and regulations.

If you have excellent credit and good standing, you can expect to pay $100 to $300 per year. This works out to 1% to 3%. If you have average or bad credit, expect to pay up to $1,000 (10%) per year or more.

It is common for them to last one year, but they can last for several years. The length of time the bond is valid is set when you purchase it. Once it expires, you will have to renew it.

It may or may not be refundable. Speak with your provider about the terms and conditions of the bond.

Surety bond claims are different than business insurance claims. Your customers file claims against a surety bond, not you. A client will file if you fail to meet your obligations. The client will contact the company who issues you the bond to start the process.

If the claim is valid, the bonding company will pay out the bond. Your company will need to reimburse the bonding company for the amount.

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We can help you get a surety bond

Finding a reputable Canadian surety insurance company is vital. They need to offer you affordable rates and the type of bonds your company needs. Our experts help you find the right bond products from the top Canadian providers.

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