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What is a Surety Bond?

Region: Ontario Answer # 2790

What is a Surety Bond?

A Surety Bond, or surety, is a guarantee that a company or individual will deliver on a specific obligation. Surety Bonds usually fall into two categories:

Contract Surety Bonds: if you’re a developer planning a construction project, a Contract Surety Bond acts as a financial guarantee that the construction company will build your development as specified in the contract.

Commercial Surety Bonds: if your company is entering into an obligation with a governmental agency or bureau, a private entity, or a federal, provincial, or local court, a Commercial Surety Bond provides piece of mind that you will fulfill the obligation as promised in the contract.

A surety involves three parties:

  1. The Principal: the contractor/licensee/trustee/applicant that’s supposed to be performing the work or fulfilling the obligation.
  2. The Obligee (beneficiary): the developer/estate/consumer/government entity for whom the work is being done.
  3. The Surety: the company that is making the guarantee on behalf of the principal to the obligee.

How does a Surety Bond work?

A Surety Bond is signed by the principal and the surety. If the principal doesn’t meet the obligation of the contract, then the obligee may make a claim. The surety is financially responsible for the claim, up-to the limit of the bond.

Types of Surety Bonds

There are many types of Surety Bonds. These include:

  • Contract Bonds / Performance Bonds
  • Estates Bonds
  • Guardianship Bonds
  • Customs and Excise Bonds
  • Carnet Bonds / Merchandise Passports
  • Lost Document Bonds

How much does a Surety Bond cost?

The cost of a Surety Bond can vary quite a lot and is based upon:

  • the financial strength of the principal; and
  • the details of the obligation being covered by the surety.

Costs may differ between Contract Bonds (Performance Bonds) and Commercial Surety Bonds (Estate, Guardianship, Customs and Excise, Lost Document and Carnet Bonds). Contract bonds normally cost between half a percent and three percent of the value of a contract or bond obligation (limit), and are often priced on a sliding-scale, meaning – the larger the bond, the lower the percentage, or, the smaller the bond, the higher the percentage.

The cost of most Commercial Bonds, except for estate bonds, is often a flat rate.

For more information about Surety Bonds, or to purchase a bond, contact Ai Surety Bonding.

 


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