Surety bonds are commercial insurance tools used to ensure the performance of a duty or obligation. They create a relationship between three parties: the principal, the obligee, and the surety. If the principal is unwilling or unable to meet its obligation to the obligee, the surety compensates the obligee, protecting it from financial losses resulting from the principal’s performance (or lack thereof). There are many types of surety bonds, with the most common including fiduciary bonds, custom and excise bonds, license and permit bonds, and lost document bonds. All are used in a wide range of industries and business situations, including Alberta’s oil and gas industry, small business sector, and real estate business.
Types of Surety Bonds
The four most common types of surety bonds are:
- Fiduciary bonds. In situations where a court-appointed trustee, executor, guardian or fiduciary acts on behalf of another individual, a fiduciary bond is used to protect that individual from the fiduciary’s intentional or unintentional failure to meet his or her obligations. These bonds are intended to protect beneficiaries in the event that the fiduciary acts in a manner that causes financial losses. Situations in which fiduciary bonds may be required include the settlement of an estate, bankruptcy negotiations, and management of funds being held in trust.
- Customs and excise bonds. These surety bonds are used to ensure that all taxes and duties on imported, exported, and internationally distributed goods are paid, and that all laws and regulations required for customs clearances are met.
- License and permit bonds. These surety bonds are required for commercial activities that pose some level of risk to the general public. They are mandated under provincial law and guarantee that the bond bearer will act in full compliance with all existing laws and regulations governing their commercial activities. License and permit bonds protect the public from fraudulent and/or negligent behaviour on the part of the bond bearer.
- Lost document bonds. Certain types of assets, such as stocks, securities, and government bonds, are issued in document form. Lost document bonds protect the asset holder from the loss, theft, or destruction of such documents. These surety bonds are most commonly used by businesses dealing with a large volume of such assets, but they can also be purchased by individuals.
Industry-Specific Examples of How Surety Bonds Are Used
One sector in which surety bonds are regularly used is Alberta’s oil and gas industry. In many cases, land owners require surveying, drilling, and extracting teams to carry license and permit bonds to facilitate the reclamation of the land once the commercial activities have been completed. These bonds are used not only to provide security to the land owner, but also to ensure that all surveying, drilling, and oil extraction activities meet government safety standards and do not pose a threat to the general public.
Builders and land owners in the real estate sector also use license and permit surety bonds. In the case of a builder, the surety bond is necessary to ensure that construction crews are meeting all licensing and safety requirements, and that their completed buildings meet agreed-upon standards. Land owners may also need surety bonds to enact certain types of property improvement or development initiatives, especially for activities that could potentially affect adjacent lots owned by other individuals.
Companies operating in the importing/exporting and financial services industries also use surety bonds to protect themselves and their customers from potential liabilities.
If you are uncertain if you need the protection offered by a surety bond, or if you’re not sure what type of surety bond is right for your business, you should speak to an insurance broker to review your options. At Lane’s Insurance, we offer a comprehensive range of surety bonds for all commercial activities. If you have questions, or if you would like to learn more, we invite you to contact one of our friendly and knowledgeable customer service representatives.
