Ontario Surety Bonds – Zehr Insurance Brokers Ltd.

What are Bonds and Suretyship?

There are three parties to a surety bond: the principal, the obligee, and the surety.

When discussing contract bonds, the principal will typically be the contractor hired to complete a project. The principal owes their obligation or performance to the obligee. The surety guarantees this obligation.

An obligee to a bond is the project owner. The obligee receives the surety’s guarantee that the principal will fulfill their duties as described in the contract.

The surety is usually an insurance company. The surety underwrites the principal based on a multitude of factors and charges a premium for bonds issued which guarantee duties or obligations to the obligee.

These three parties all sign and are bound by the terms and conditions of the bond. It is important to understand that the surety does not sign the initial project contract between the project owner and the contractor. Upon contract default, the surety’s obligations are laid out in the bond wording and the surety will step into the contractor’s role to either remedy the default, complete the project, or pay the bond penalty to the owner.

Typical insurance policies like home or farm insurance will be between two parties – the insured and the insurance company. In a typical insurance policy, the benefactor of indemnification is the policy holder who is the insured. However, the benefactor of indemnification under a surety bond is the obligee (or project owner) who does not purchase the policy.

Claims Example: The general contractor on a project has stopped paying the subcontractors responsible for installing the heating and cooling system in an apartment building. As a result, the HVAC sub has stopped working on the building which not only delays this portion of the project but all related construction such as final drywalling and painting. The project required the general contractor to purchase a labour & material bond for the project and with the help of the Surety, the situation is remedied and the project continues.

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