In a contract, a tender or certain financial transactions, you may be asked to provide a surety bond. The term sounds familiar — many people assume it is a kind of insurance — but the two work on quite different principles. Understanding the difference helps you know what to expect when you submit a request, and why the assessment of your file matters so much.
Surety in a nutshell
A surety is an undertaking under which one party guarantees certain obligations of another party to a beneficiary, subject to the terms of the surety agreement or bond. In other words, the surety does not replace the person or business making the commitment: it stands alongside them to give the beneficiary additional security.
There are usually three parties involved:
- The principal — the person or business making the commitment — for example, a contractor submitting a bid or performing a contract.
- The obligee — the party to whom the commitment is made and who requires the guarantee — for example, the project owner.
- The surety — the party that guarantees certain obligations of the principal, within the limits and on the terms set out in the bond.
Insurance: a way of sharing risk
An insurance policy generally involves two parties: the insurer and the insured. The insured pays a premium and, in return, the insurer agrees to compensate them if certain covered events occur, subject to the terms of the policy. Insurance is designed to spread risk across many policyholders: the insurer expects some claims to happen and factors them into its pricing.
What really sets them apart
- Who is protected — With insurance, the protection is primarily for the insured. With surety, the guarantee benefits the obligee — not the principal who requests it.
- The starting assumption — A surety is generally structured on the expectation that the principal will meet its commitments. The assessment exists precisely to determine whether the obligation appears compatible with the principal’s capacity.
- The principal remains responsible — A surety does not release the principal from its obligations. Depending on the applicable terms, a surety that has to step in may then seek reimbursement from the principal.
- What is being assessed — An insurer evaluates the likelihood of an event. A surety focuses mainly on the person or business making the commitment: its financial position, its experience and the nature of the obligation.
Surety and loans: two different products
Another common mix-up involves loans. A surety is not money paid out to the applicant. Avila provides surety solutions; when financing is associated with a transaction, it may be provided by a separate financial institution or lender.
When might you need a surety?
Needs vary with the context. For example, a surety may be required:
- from a contractor, in connection with a bid or a construction contract (bid, performance or labour and material payment bonds);
- from a business, to meet a contractual, commercial or financial obligation;
- from an individual, when certain financial transactions call for a guarantor or additional financial security.
For individual programs, Avila does not provide surety directly to the public: applications must be submitted through a participating partner.
How is a request assessed?
At Avila, every file follows the same main steps: submission, assessment, verification, decision, issuance and, for certain programs, ongoing review. Additional information or documentation may be requested along the way. After review, a file may be approved, conditionally approved, returned for additional information or declined.
Criteria vary by program and partner, and every request remains subject to a complete review.
In short
Insurance protects the insured against certain events; a surety guarantees the obligee certain obligations of the person or business making the commitment. Grasping that distinction helps you prepare a stronger request — and explains why a surety pays such close attention to the applicant’s financial position and experience.