A surety bond is a guarantee that a company or individual will live up to a specific obligation. That individual or company is the principal, and if the principal meets that obligation, the customer is happy.
If the principal doesn’t deliver as expected, then the beneficiary, also known as the obligee, may make a claim. The third party in this arrangement is known as the surety or guarantor. This is the company that will be paying up on that guarantee if the principal does not follow through as expected.
A surety bond is more like credit, rather than insurance as the company guaranteeing the surety bond has no desire to pay, just like a banker making a loan will do its best to avoid losing its money permanently. Similar to a banker, the surety underwriter is going to do some investigation of the principal in order to feel comfortable making a guarantee on that principal’s behalf.
The two most common forms of surety are contract surety and commercial surety
Contract Surety bonds are primarily used in the constructions industry and include Bid Bonds and Performance and Labour and Maintenance Bonds.
Commercial Surety bonds are intended to satisfy the security requirements of public, legal and governmental entities and protect against financial risk. These bonds guarantee that the business or individual will comply with all required legal obligations. Commercial Surety Bonds include Canada Customs and Excise Bonds, Fiduciary Bonds and License and Permit Bonds.