Frequently Asked Questions
Do you have questions? We have answers. Please take a few moments to look through the following FAQs and see if the information you’re looking for is there. If its not, or if you have additional questions about surety bonding or our company, contact us.
What is suretyship?
Simply stated, suretyship is a guarantee of performance. This performance can take many forms. It may be the performance of a contract to construct a building, or performance in the form of compliance with an act of parliament, municipal bylaw or city ordinance.
How is Western Surety able to offer this protection?
Western Surety Company possesses the required financial strength and government licensing to provide surety guarantees to private owners and government bodies. Since Western Surety backs up their guarantees with their own assets, we do not write bonds indiscriminately. Before Western Surety Company approves a surety bond, we conduct an extensive prequalification review of the applicant.
Is surety the same as insurance?
A surety bond is not an insurance policy. An insurance policy promises to pay the insured for any losses that are covered under the policy. These losses are paid out of the combined pooling of all the insurance premiums paid by all policy holders. An insurance policy assumes that there will be losses so the premiums are calculated to cover the losses which will occur.
A surety bond is an extension of credit, with the assumption that there will be no losses. The bond premium paid to the surety is simply a service fee for the surety provider to allow its credit to be used. The bond premium is intended primarily to cover the underwriting expenses of the surety company. When losses do occur, they often have a significant impact on the surety company’s financial results.
What is a surety bond?
A surety bond is a legal document guaranteeing that an obligation will be met. A surety bond prequalifies an applicant to access opportunities such as obtaining a contract or operating a business. It is a three-party agreement where the third party (the surety company) guarantees to a second party (the obligee or owner) the successful performance of the first party (principal or applicant).
For example, a surety company (the third party) would guarantee that a contractor (the second party) would successfully complete construction of an overpass for a provincial government (the first party).
What are surety bonds used for?
Different surety needs are met by different types of surety bonds.
Federal, provincial and local governments often require surety bonds to guarantee that business owners and individuals will comply with various laws protecting public funds. Contract bonds protect taxpayers and private construction owners by guaranteeing that projects will be completed properly, on time and without liens. Many commercial surety bonds protect and secure public funds and private interests.
This protection is needed because construction is a very risky business. Contractors fail every year, leaving behind unfinished private and public construction projects – and billions of dollars in losses. Surety bonds offer the best way to protect against the risk of contractor failure. Essentially, they guarantee a contractor’s performance, assuring that construction projects will be built on time and that certain material suppliers and subcontractors will be paid.
Can bonds be written only on projects which are let out for bid?
No. While performance and payment bonds for jobs that are bid are very common, contract bonds provide the same protection to owners who prefer to negotiate their contracts.
Are letters of credit a suitable substitute for surety bonds?
The short answer is no. Surety bonds offer the best way to guarantee a contractor’s performance.
With a letter of credit, the bank simply pays over a sum of money to the project owner if there is a default. The amount is usually less than what is needed to finish the project and the bank assumes no role in arranging for the work to be completed.
The surety bond company has duties and responsibilities to both the contractor and the project owner based on the underlying contract. The bonder strives to be equitable to all parties to successfully ensure the completion of projects.
A letter of credit is just about money. A surety bond is about finishing the job.
Are surety bonds available for small contractors?
Western Surety judges all applicants on their individual merits regardless of size. While contractors may not have the credit history, experience and financial capacity to obtain bonds or to qualify for as much bonding as would like, we work hard to create opportunities for small contractors who want to take on bonded work.
What is involved in the underwriting process?
Surety underwriters make decisions on bonding applications based on information compiled by the agent or broker and by the surety company itself. The company must determine the probability of a loss, analyzing the applicant’s financial standing, business aptitude, expertise, experience and equipment. This is called the underwriting process.
Surety company underwriters evaluate risk in much the same way as banks evaluate loan applications. Underwriters consider business and personal financial statements, credit reports, credit references, and many other factors including experience, management skills, track record, and character. Underwriting surety bonds involves the responsibility of ensuring that the people who get bonds are in fact entitled to them. Western Surety Company takes its prequalification responsibility very seriously.
What is indemnity?
To indemnify means “to make whole.” Under the common law in Canada, the surety has the right to be indemnified by the “principal” – the persons or company they are bonding in the event of a loss. The Indemnity and Security Agreement reinforces that right by stipulating that if the surety suffers a loss while providing a bond, the principal is obligated to make the surety ‘whole’ by reimbursing any losses and expenses. Personal indemnification demonstrates the principal’s personal commitment to the business entity and to the surety company. Western Surety Company does not automatically register indemnity agreements under the Personal Property Security Act (PPSA) of the province(s) in which the principal is active, but may do so at any time in their sole discretion and in accordance with the terms and conditions of the indemnity agreement.
Does Western Surety Company require collateral on all their bonds?
No. In specific cases, such as high risk principals or unusual obligations, a surety may request collateral. There are many forms in which collateral may be provided, including irrevocable letters of credit or certificates of deposit.
I need a surety bond. How do I get one?
Contact your insurance broker and have them get in touch with Western Surety. Your broker has likely arranged surety bonds before, and can assist you with the process. If your broker can’t help you, click here to find brokers in your area who have been appointed by Western Surety. They will be happy to help you obtain the surety bond you need.
I'm an insurance agent or broker. How can I get a Western Surety Company appointment?
Click here for more information.
More Questions? Any Comments?
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