Differences between surety bonds and insurance
View the video here on your mobile device.
This video first ran in November 2011.
Narrator: So what is the difference between Surety bonds and insurance? Sheila Thompson the President of Rosenberg & Parker of Canada, a company that specializes in writing surety bonds, explains.
Sheila Thompson: Insurance is a two-party contract. You have the insured and the insurer and you have the group of losses that you want to cover, and so if there is a loss that happens it is covered by the policy. The insurance company steps in and resolves the problem; makes good the loss.
In surety there are three parties: There’s the insured, which we call the principal, the one who’s actually performing the contract. There’s the obligee, or owner, the one for whom the principal is performing the contract and then there’s the surety company that’s guaranteeing that contract.
So you have a contract between an contractor, usually, and an owner to perform work, and the guarantor is the surety company to guarantee that contract.
Narrator: In Canada, there are two types of Surety Bonds: Contract and Commercial. Sheila discusses the differences.
Sheila Thompson: Contract surety guarantees performance of construction contracts. It also guarantees payment to sub-contractors and direct suppliers, so that is used in the construction marketplace.
The commercial surety marketplace is very different. It guarantees compliance with a bylaw, compliance with an act of parliament. For example customs bonds which are guaranteeing payment of duties as good cross the border. There may be legal bonds which are used in court cases to guarantee payment if there is a ruling against someone. Administration bonds in the case of someone who has died without a will to guarantee that the administrator will execute the will in accordance with the terms and conditions of the will and also with the provincial law. It’s very different.
In the U.S. we have the same distinction between contract and commercial. Commercial in the U.S. is a broader kind of definition. In the U.S. we’ll look at companies who are usually Fortune 2000 companies who are performing construction style contracts, but they may be supply style contracts and maybe actually issuing construction bonds but not so much looked at as a constructor. In Canada we are skewed more to contract than commercial surety.
