Surety Vs Insurance

What is the different between surety bonds and liability insurance

Most people confuse between the word surety bonds and the surety bonds insurance. Surety bonds and insurance are different forms for security served to the general public and other professionals. It is easily to mistake the meaning behind Surety Bonds are very common and used in industries make business fields safer.

Insurance offer the public with premiums, on a daily basis, and they offer compensation if any losses occur that the insurance company could cover. Insurance is a great thing for companies because they protect them from high risks that they might be facing and all they ask in return are regular payments.

Surety vs insurance.

Surety bonds on the other hand work very differently. These bonds are required by business because it gives them assurance that you will follow all the rules and regulations of the business. Other then rules and regulations, they expect your honesty and performance. Parties are protected by the surety bonds who may be affected by your own business for example the clients or the subcontractors.

In order to purchase the bonds, you need to pay for the premium for you to get bonded. If you are unable to fulfill your responsibilities under the bond, someone could claim on your bond. The premium covers all the underwriting and the pre-qualification costs for the bonds. The principle is responsible with the risk and if the claim against you is proven, you must pay the other party. If you are bonded, it gives the customer a powerful sign that it is safe to do business with your company. It also helps increase your business reputation and sends a dominant message if you want to market your company.

 

A few characteristics for Surety Bonds are:

* Is a 3 party agreement

* Gives assurance of the performance

* Guaranty that you will follow the rules and regulation

* Must provide financial obligations to the surety company

liability-insurance-in-canada

A few characteristics for insurance are:

* Is a 2 party agreement

* No longer risk on you but it is on the insurer

* Payments are expected to be paid

* Both parties must hold a legal obligation to each other

 

Surety Bonds and insurance are required by many businesses because they help compensate the risk factor in different aspects. Something similar about them is that they are both use for risk management tool but are just use for different purpose.

 

Common professionals that require the bonds are usually construction contractors, freight brokers, telemarketers, mortgage brokers and others. For these professionals, surety bond is an essential in order for them to get their license. Some of the popular bonds are auto dealer bonds, freight broker bonds, and contractor licence bonds. Contract bonds are very common bonds because it provides guarantee of the completion and the quality of a construction project. The bonds are usually obtained on a project basis. Usually people who get bonded also get proper insurance in order to operate without

 

taking risks. Insurance application are usually more general, they are required by most individuals and companies.

What is a Performance Bond?

Let’s start form the basics

A Performance bond also known as a contract bond is given after the job is awarded to the lowest bidder. The bid bond is replaced by a performance bond which ensures that the contractor must complete the project or job in Canada. Also, the contractor must obey all the terms and conditions and you must obey them otherwise, there are penalties. Performance bonds are commonly used in the construction industry because the developer requires a guaranty from the contractors that they will value that work and not go leave the work unattended before it is finished.

 

performance-bonding-for-business

 

The Benefits of Performance Bonds:

1. A letter of credit (LOC) is given to the owner which means that if there is a problem with the contractor, that letter would provide the money to fix the problems. It provides you the money but not a completed project.

2. Provides the owner with the peace that even with if there is a problem with the contractor, the project will successfully complete the terms and conditions provided in the original contract.

3. The performance bond provides full protection of the amount loss. The owner is not responsible for any deductibles or any other payments. The owner must find a new contractor to complete the project.

What an Owner can do Before a default:

The owner can make a formal claim but that could only be done if the default or the problem by the contractor is declared. The owner should not wait for things to get worse before they call the surety company. As the owner comes across performance issues that could lead to defaults, immediately they should inform the bonding company.

 

A few ways the Surety can prevent the defaults:

1. They provide assistance to solve the problems

2. Contacting and meeting the parties and informing about the issues the owner has been facing

3. Lastly, they could help find solution by implementing and adjusting the contracts that would convince the owner and allow the contractor to continue with the project

 

Making a Claim Under a Performance Bond:

To make a claim under the performance bond, there are 3 conditions that should be met:

1. The owner or also known as the obligee must write a letter formally mentioning the bonded contractor who is also known as the principle is in default under the contracts terms and conditions

2. The contractors must be in default by the terms and conditions

3. The owner should have satisfied their obligations under the contract.

 

If these conditions are met, this gives four options to the surety:

1. Remedy – Means that the surety will fix the situation and try to convince the owner to take back the default and allow the contractor to continue with the project

2. Complete – The surety company could use the formal contract with the owner to finish the contracts obligation given by the contract

3. Arrange for Completion – the surety could find a replacement contractor to finish the contractor’s obligations. They can make another completion contract between the owner and the new contractor.

4. Payout – the surety is intended to pay the sum of the money to the owner which is:

  • The additional cost to complete the project or the amount of the bond