What Is a Commercial Insurance Bond?

Certain professionals and small businesses often find themselves needing commercial insurance bonds to meet obligations tied to their customer contracts. For many contractors and business owners, securing a bond isn’t just a smart move – it’s a legal or regulatory must-have, often tied to obtaining licenses or meeting industry standards.

A commercial insurance bond is different from a business insurance policy. Both are valuable risk management tools. However, they differ in how they are structured and who is paid if a claim is filed.

Let’s go over what a commercial insurance bond is, the types available, how they work, and who may need one.

Download Our FREE Insurance Guide

Learn everything you need to protect your small business.

Your email address will be used by Zensurance to provide latest news, offers and tips.
You can unsubscribe at any time.

Understanding Commercial Insurance Bonds

Commercial insurance bonds, also known as surety bonds, are contracts between three parties: a business owner or contractor (the “obligee”), a customer (the “principal”), and an insurance company (the “surety”).

Bonds are used to guarantee work or an obligation is performed in accordance with a contractual agreement or legal requirement.

If the principal does not complete their contractual obligations to an obligee as agreed, the insurance company steps in to pay the obligee an agreed-upon amount, or fulfill their duties under the bond which could include completing the contract. However, the principal is legally required to reimburse the insurance company for the amount paid to the obligee through the bond.

Two Main Types of Commercial Insurance Bonds

There are two main types of commercial insurance bonds. Each type serves a unique purpose:

1. Commercial Surety Bond

Commercial surety bonds are designed to protect consumers against fraud and misrepresentation and provide compensation if they suffer a monetary loss. Government agencies or financial institutions usually require this type of bond to guarantee compliance with provincial regulations or municipal bylaws. A few examples of commercial surety bonds include custom bonds, court bonds, title bonds, fidelity bonds, and license and permit bonds.

2. Contract Surety Bond

A contract surety bond is designed to protect a property owner (e.g., a contractor’s customer) from financial loss if a contractor fails to fulfill their contract terms and conditions. Examples of contract surety bonds include performance, labour and materials, payment, bid, and supply bonds.

Note: Speak to a Zensurance broker if you require more information on commercial bonds.

What Types of Businesses or Professionals Need Commercial Insurance Bonds?

A broad range of businesses or professionals may be required to purchase a specific type of bond. Here are a few examples:

• General Contractors and Construction Companies: Typically require bid bonds, performance bonds, and payment bonds to guarantee the completion of projects as per the contracts they sign and to ensure that any subcontractors they hire are paid for their work.

• Companies with Licenses and Permits: Businesses like auto dealerships require surety bonds for licensing, and mortgage brokers need bonds to ensure ethical practices. Many companies across various industries may require bonds to comply with provincial or municipal regulations.

• Cleaning Professionals and Janitors: Professional cleaning companies, independent cleaners, and janitors typically require fidelity bonds to protect customers from theft or damages caused by a cleaning company’s employees while working. In some scenarios, cleaning companies can meet their bond requirements by purchasing commercial crime insurance, provided they also have commercial property insurance.

• Retailers Selling Alcohol or Lottery Tickets: Retailers require lottery or liquor license bonds to legally sell lottery tickets and alcoholic beverages to comply with provincial licensing requirements and the proper handling of revenues collected from those sales.

• Technology and Software Providers: These types of businesses usually need performance bonds to guarantee software delivery or technology implementation projects are delivered as promised to customers.

What’s the Difference Between Commercial Insurance and Commercial Surety Bonds?

A commercial insurance policy (aka business insurance) is designed to protect a business owner from risks and financial losses caused by accidents or events beyond their control.

A commercial surety bond protects a third party, such as a customer or government, by guaranteeing that the obligations of a business or contractor they hire are fulfilled per a signed contract.

Sometimes, a business owner may require business insurance and a commercial surety bond.

How to Get Low-Cost Insurance and a License and Permit Surety Bond

Zensurance is Canada’s leading provider of small business insurance, covering hundreds of thousands of business owners and independent professionals across Canada in multiple industries with customized, affordable insurance.

We can also help you get the license and permit surety bond your business needs.

Fill out our online application for a free quote in less than five minutes.

Let our knowledgeable broker team get the financial protection you need for your business and the commercial surety bond you require from our insurance and surety markets, so you can focus on growing your business and delighting your customers.

– Reviewed by Andrew J. O’Brien, VP Legal and General Counsel, Darlene Hazzard, Director Underwriting, Matt Daniels, Associate Director, Specialty Solutions, and Aharshan Thangarasa, Senior Team Lead, Digital Solutions Team, Zensurance.