Bonds are not insurance policies

November 12th, 2015

Bonding. Bondable, Bonded. So what does this mean to a person or business? From a potential loss perspective, it could mean a lot.

Often, we see the phrase “ insured and bonded” on company letterhead and signage. To the average person this can be confusing and sometimes the words are interchanged and used improperly. Being insured is one thing, and being bonded is another.

What is a bond?

 More commonly referred to as a surety bond, this is provided to guarantee a third party (obligee) against loss in the event the terms of a contract are not completed. The surety company assumes liability for contract non-performance.  A bond is essentially a promise to pay or perform. If the bond holder defaults in their execution of a contract, then the bond will respond to indemnify the third party.  The “principal” (bond holder) will be held financially responsible for any losses paid out to the “obligee” by the bond issuer (surety).

This is a major difference between bonds and insurance.

What does bondable mean?

 It can mean several things but usually it means that the person is capable of performing their work as per the contract terms and able to meet their financial obligations. Because surety bonds are non-cancellable, the person or organization must first go through a fairly rigorous financial and operational review with the bond issuer before being granted one. There are essentially three areas that underwriters consider when reviewing a new application; capital, character, capacity.

What kind of bond do I need?

That is up to the prospective bond holder to decide before entering into a contract that requires one. Bond requirements are very specific and are usually included in the contract. Some of the more common bonds are bid bonds, performance bonds, labour and material payment bonds.  There are also miscellaneous bonds such as administration, guardian and committee bonds.

Will my credit rating change if I apply for a surety bond?

A bond is not registered as a lien. There is no credit “hit” on an application – only in the event of a claim.

If you are unsure of your needs, we would be happy to assist you or visit . www.surety-canada.com.