Bonded vs. insured

Tender documents often ask a contractor to be "bonded and insured" as if it were one requirement. It is two. A bond is a guarantee that the contractor will perform; insurance is protection against loss. The parties, the underwriting, and what happens at claim time are all different.

Bonded: the surety bond

As the Surety Association of Canada explains, a surety bond always involves three parties: the obligee (the owner or buyer to whom the bond is payable if the contractor defaults), the principal (the contractor whose obligation is guaranteed), and the surety (the bonding company guaranteeing that obligation). Simply stated, the surety guarantees the owner that the contractor will perform the contract. Underwriting works like credit: the surety qualifies the contractor's capacity, experience and financial strength, and the contractor indemnifies the surety — if the surety has to pay out, it looks to the contractor for recovery. That is why a bond is not a prepaid loss fund: it is a guarantee backed by the contractor's own obligations.

Canadian construction uses standard surety forms published by the Canadian Construction Documents Committee: CCDC 220 (bid bond, guaranteeing the bidder will enter the contract and provide the required security if its bid is accepted), CCDC 221 (performance bond, guaranteeing performance of the contract), and CCDC 222 (labour and material payment bond, guaranteeing the contractor will satisfy its labour and material payment obligations) — issued in updated 2024 editions.

Insured: the insurance policy

Insurance is a two-party arrangement between the policyholder and the insurer: the contractor pays a premium, and the insurer covers specified losses (property damage, bodily injury liability under commercial general liability, and so on). Unlike a bond, insurance is priced on actuarial risk across a pool of policyholders, not on the individual contractor's creditworthiness, and there is no expectation that the insured repays the insurer for paid claims (except through subrogation against a third party actually at fault).

Why tenders ask for both

The two instruments protect against different failure modes. Insurance responds to accidental losses during the work — a job-site injury, damage to adjacent property. Bonds respond to contractual failure — the contractor not bidding in good faith (bid bond), not completing the work (performance bond), or not paying subtrades and suppliers (labour and material payment bond, which protects those third parties even though they are not parties to the contract). An owner who accepts insurance in place of a bond has no guarantee of completion; an owner who accepts a bond in place of insurance has no coverage if a worker is hurt.

Common questions

If a claim is paid under a performance bond, does the contractor repay the surety?

Yes — that is the standard arrangement. The contractor signs an indemnity agreement in the surety's favour, so the surety's payout becomes a debt of the contractor, often secured by collateral. With insurance, there is no equivalent repayment obligation for covered losses.

Is a surety bond "just insurance for the owner"?

No. The Surety Association of Canada and surety industry guidance are explicit that bonds are not insurance, even though both are placed through licensed surety/insurance companies. The distinguishing features — three parties, contractor indemnity, credit-based underwriting, and a claims process triggered by a declared contractor default — mean the products behave very differently when something goes wrong.

Related definitions

Bid bond vs. performance bond · Performance security · Consent of surety · Holdback vs. security bond