Surety always involves three parties:

1. Obligee: the party to whom the bond is payable in the event of a default;
2. Principal: the party on whose obligation is guaranteed; and 
3. Surety: the party that assumes the obligation if the principal cannot.

A surety bond protects the obligee against losses, up to the limit of the bond, that result from the principal's failure to perform its obligation or undertaking.  Unlike insurance, a loss paid under a surety bond is fully recoverable from the principal.

The two most common forms of surety are contract surety and commercial surety.

CONTRACT SURETY BONDS

Contract surety bonds are used primarily in the construction industry. These bonds protect the owner (obligee) from financial loss in the event that the contractor (principal) fails to fulfil the terms and conditions of their contract.

COMMONLY USED CONTRACT SURETY PRODUCTS

There are five commonly used contract surety products.  The first three are used at the pre-tendering or tendering stage and the last two are used for contract performance.

1. Prequalification Letter;
2. Consent of Surety/Agreement to Bond;
3. Bid Bond;
4. Performance Bond; and
5. Labour and Material Payment Bond.

TYPES OF CONTRACTS SECURED BY SURETY

The most common types of projects secured by surety in the public sector are:

1. Project security for construction contracts;
2. Performance security for service contracts (e.g. recycling, waste collection, snow removal); and
3. P3 contracts (e.g. hospitals).

INDUSTRY LICENSING REQUIREMENTS

In Canada, surety bonds may only be issued by companies licensed to do so, either federally, or by one of the provincial insurance regulatory bodies. The requirements to obtain such a license are demanding and applicants are required to demonstrate financial solvency and sufficient strength to meet potential claims obligations. Only firms that are licensed to sell surety bonds in Canada may become members of the Surety Association of Canada.

COMMERCIAL SURETY BONDS

Commercial surety bonds satisfy the security requirements of federal and/or provincial courts, government bodies, financial institutions, and private corporations and protect against financial risk. These bonds guarantee that the business or individual will comply with all required legal obligations. 

For a consumer, this means that commercial surety bonds protect against fraud, misrepresentation, and compensation of monetary loss. 

Commercial surety bonds can be used to guarantee performance of non-construction related contractual obligations.  For example, companies that supply and install equipment.  An organization may require a bond so not only does the supplier install the equipment, it will also service the equipment.  

COMMONLY USED COMMERCIAL SURETY PRODUCTS

1. Court Bonds
   a. Judicial Bonds; and
   b. Fiduciary Bonds
2. Customs & Excise Bonds
3. License & Permit Bonds
4. Lost Documents Bond

INDUSTRY LICENSING REQUIREMENTS

In Canada, surety bonds may only be issued by companies licensed to do so, either federally, or by one of the provincial insurance regulatory bodies. The requirements to obtain such a license are demanding and applicants are required to demonstrate financial solvency and sufficient strength to meet potential claims obligations. Only firms that are licensed to sell surety bonds in Canada may become members of the Surety Association of Canada.