What Does It Mean To Be Bonded?
There is a lot of confusion about what a bond actually is and, moreover, what it means to use a bond issued in the insurance space. When seeking a bond, businesses are required to answer a lot of questions and provide significant information about their business – and for good reason: a bond is NOT an insurance policy and requires repayment if it is used.
One of the great aspects that comes naturally to a bondable business is that it, for the reasons outlined here, helps your business to secure larger clients or clients that require guarantees of your company’s ability to complete work that you are contracted to do.
So let’s dive into bonds and get you feeling more comfortable about the subject.
What is a Surety Bond?
To understand the general concepts in and around a bond, you should ensure you understand what is a bond is and how it is used.
A bond (or contract bond) ensures that the obligations of a contract are met and, in cases where they are not, the bond acts as the financial vehicle to compensate your client. A good example, and where it is quite common, is in the construction industry: if your firm does not complete a contracted project, the bond is paid directly to your client. This enables your client to hire another firm to finish the work you started.
A Surety Bond is Not Insurance. A Bond is a Financial Guarantee
A bond is actually a financial guarantee and is used in cases to ensure that a client of your business is protected from a loss in the event that your business, under contract, cannot – or simply does not – complete the work for which you are contracted. A surety bond, in the case of non-completion, pays out the Obligee (the client), on your behalf. Therefore, a bond is a financial guarantee for the Obligee.
Why Do Parties Issuing Surety Bonds Request So Much Information?
To obtain a bonding facility, the issuer, a surety company, requires the collecting of substantial information. The issuer is NOT guaranteeing your performance but, rather, is giving your client (the oblige) a financial guarantee that you will complete the work. So, in order to issue the bond/guarantee to a business, the issuer requests a vast amount of information about your business, reputation, completed projects, history and more, all to assess your capacity, ability and likelihood of completing contract work.
What if My Business Does Not Complete the Contracted Work?
The issuers ask a lot more information than the bank for a loan, for instance, because the surety company is providing the person who is asking for a bond a financial guarantee (your client) that they will either make sure the work is completed or pay out up to the value of the agreed bond limit. If they payout a dollar amount equivalent to the uncompleted work, it may be paid up to the limit of the bond.
Being a Bondable Business
When insurance companies ask if your business is bondable or what limits you have, they are asking if your business has a bonding facility set up and what dollar limits are under that bond.
Once you have a bonding facility set up you can obtain a variety of bonds such as bid bonds, performance bonds and material/labour bonds when bidding on a project through a tendering process. A bonding facility indicates to your client that you have met the Surety department’s rigorous qualifications in order to qualify for the bond. It indicates that you are financially sound enough to take on the work up to the limit provided by the bonding facility. Your clients can immediately feel more confident in our ability to complete a project with less fear of loss.
Repaying a Surety Bond
If a bond pays out because you didn’t complete the work, you must pay that money back to the surety company. This type of bond is called a Surety Bond and, again, this financial vehicle is not an insurance policy. It is important to note that after a bond is paid to your client (because your company didn’t finish the contracted work), your insurance company can pursue recourse against your company for the complete reimbursement of the amount paid out to your clients.
Do You Need a Surety Bond?
Have a discussion with your insurance broker and we’ll help you to figure out what type of bond suits your business objectives best – as well as the limits and guarantees – that will help you most.