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What is a Surety Bond?

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Think of Surety Bonding as a money-back guarantee. If you’re a developer planning a construction project, surety is the financial guarantee that the construction company will build your development as specified in the contract. If your company is entering into an obligation with a governmental agency or bureau, a private entity, or a federal, provincial, or local court, surety gives that entity piece of mind that you’ll fulfill the obligation as contractually promised. Surety can assist in guaranteeing just about any obligation that your company can find itself entering into.

 

A Surety Bond is a guarantee that a company or individual will deliver on a specific obligation. That individual or company is the Principal, and if the principal doesn’t meet the obligation of the contract, then the beneficiary, known as the Obligee, may make a claim. The third party of a deal is the Surety. This is the company that will be paying up on that guarantee if the principal doesn’t follow through as expected.

 

All Surety involves three parties:

 

  • The Principal: The contractor/licensee/trustee/applicant that’s supposed to be performing the work or fulfilling the obligation.
  • The Obligee: The developer/estate/consumer/government entity for whom the work is being done or the party to whom the principal is promising that it will live up to its obligation.
  • The Surety: The Company that is making the guarantee on behalf of the principal to the obligee.

Types of Surety Bonds

 

Surety Bonds come in all shapes and sizes. The various types of Surety Bonds have the concept of Surety in common, but they serve different purposes.

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CONTRACT BONDS (PERFORMANCE BONDS)

Performance bonds are a legal agreement in which the surety guarantees that a contractor or principal will perform the obligations according to the established plans and specifications of the contract. Performance bonds provide security to the obligee that, should the contractor fail to perform their obligation under the contract, the surety will assume the responsibilities of the contract as per the terms of the contract and subject to the conditions on the bond.

 

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LICENSE BONDS & PERMIT BONDS

License and Permit bonds are a generalized class of commercial surety required by government agencies in order to receive a license or permit as a prerequisite to start certain businesses.  Governments, at all levels, often require license and permit bonds for businesses that involve some risk to the public.

 

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CUSTOMS BONDS & EXCISE  BONDS

Customs bonds, or Excise bonds, are required by custom brokers, importers, transportation companies, logistic companies, shippers and others by the Government of Canada.

 

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CARNET BONDS

Carnets, commonly known as “Merchandise Passports”, are a globally accepted customs document that simplifies customs procedures for the temporary importation of various types of goods.  They are commonly used by sales people and manufacturers to bring their wares into foreign countries to show as commercial samples to potential clients or to display at trade shows, exhibitions or fairs.  Entertainers, sports teams, the media and service companies also frequently use carnets to travel with their professional equipment.   They are valid for up to one year and are accepted in 80 countries and territories.

 

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ESTATE BONDS

As a way to protect an estate and the beneficiaries, an executor is often required to post an estate administration bond.  The bond protects the beneficiaries and creditors in the event of improper administration of the estate assets.  A bond is usually required where an executor appointed in a will resides out of province, where there is no will or where an alternate executor is applying to the Court for appointment as executor.  The bond states that if the executor fails to perform the duties as agreed then he/she would be liable to pay the entire bond amount. The bond application is always concluded in the city/province/country where the duties are to be carried out. All applications are then analyzed by a judge to verify if all conditions have been satisfied.

 

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LOST DOCUMENT BONDS

Lost Document Bonds are required in order to obtain replacement certificates (for stock, debenture, warrant or bonds like Canada Savings Bonds), life insurance policies or other financial instruments when an individual or company loses the originals.  This bond guarantees that if the original lost document is found, it will be returned to the surety company for proper disposal and the issuer of the replacement security will not suffer an economic loss.

 

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UNCLAIMED BANK BALANCE BOND

An Unclaimed Bank Balance can be a deposit, negotiable financial instrument, or Canadian bank account issued by a federally regulated bank or trust company. In the instance these types of accounts or monies haven’t been in use, no activity has been performed in the related account for a period of 10 years or more, or no contact can be established with the owner by the concerned financial institution, the balance is transferred to the Bank of Canada.

 

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INTERNATIONAL BONDING

Though the concept of Surety is known around the world, the details in wording, requirements and issuance can vary significantly from one country to the next. Not only can the language be different outside of Canadian borders, but there are different surety practices.

 

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Miscellaneous Commerical Surety

 

Most people think of surety as something that is for construction companies and building projects. It is, of course, and that’s referred to as Contract Surety, which provides performance bonds guaranteeing that the contractor will perform the work, and labour and material bonds which ensure that the contractor will pay all vendors and subcontractors. There are also bid bonds that ensure that a contractor will, if awarded the contract, enter into that contract and obtain the other surety bonds that it requires. What many don’t realize is that Commercial Surety, covering all sorts ofbusiness and legal dealings away from a construction site, makes up almost 40% of the Surety industry.

 

What does a Surety Bond Cost?

 

The cost of a Surety bond varies significantly based upon the financial strength of the principal as well as the details of the obligation being covered by the Surety.

 

Though actual costs may differ between Contract and Commercial Surety, a common fact is that Surety bonds normally cost between half a percent and three percent of the value of a contract or bond obligation (limit).
The bond cost is referred to as the Premium, though is not to be confused with Insurance, which uses the same terminology. Bonds are often priced on a sliding-scale which means the larger the bond, the lower the percentage, and vice-versa. With respect to Commercial Bonds, the cost is often a flat rate, with the exception of Estate Bonds.

 

Applying For Surety Bond? Have Questions?

 

Contact our surety experts at 1-877-213-4545 or surety@bondsurety.ca

 

Ai Surety Bonding – Affinity Insurance Inc. is the market leader in Canada for surety and related products. Our surety experts have the knowledge and expertise in delivering Fiduciary, Customs and Excise, License and Permit and Lost Instrument bonds.

 

 

 

 

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