Business Insurance

Bonding: a (brief) overview

Bonds sometimes seem to be written, well, pretty much in Latin. While our client service representatives do speak fluent Bond-Latin, we thought we’d help translate.

Surety is a guarantee that a job will be completed according to contract specifications. If you’re a construction company, you may need to get a bond in order to be awarded a job.

Here’s how it works:

  1. Bonds are a three-party agreement. (Totally unlike insurance!)
    1. The Obligee is the person or company that owns the project.
    2. The Principal is the person or company that the Obligee hired to complete the job.
    3. The Surety is the person or company that guarantees the Principal will comply with the contract. The Surety accepts responsibility for the Principal’s performance.
  2. The Surety assures the Obligee that the Principal will successfully complete the project.
  3. The Principle and the Surety are both financially liable to the Obligee. If the Principal can’t complete the job, the Surety steps in and completes it (or may simply pay the bond penalty).
  4. Failure to perform or complete a project can invoke a claim. When a bonding company makes a payout, it has the right to seek reimbursement via a “general indemnity agreement” signed by the contractor.

A bid bond also pre-qualifies the Principal; it means they are trustworthy and reliable and that the Surety believes they are capable of performing the job. A bond can also help make sure your company’s assets aren’t tied up in letters of credit or certified cheques.

Still with us?

Here’s an example:

Jane Doe’s company is building a SportsPlex and has hired Joe Construction Company to build it. To make sure they complete the project properly, Jane asks the construction company to get a bond. Joe Construction comes to Brio Insurance to get bonded.

Joe Construction is qualified to fully complete the work (the surety makes sure of this before they are willing to issue the bond). Jane is satisfied that competent people are working on her project and should Joe Construction cease operations she will have the bond penalty amount (in addition to the sureties assistance) to help her complete the project. The Surety has removed risk for her and accepts responsibility for Joe.

Still have questions?

Talk to us! We can help you to understand the nuances of bonds further and steer you through the process of establishing bonds. We’ll make sure nothing is lost in translation.