Surety in 2020 and Beyond

Surety in 2020 and Beyond

Over the past five years, the construction industry in Alberta has become increasingly more competitive. Margins have decreased as the pool of competitors has increased. All the while, COVID-19 has compounded the situation for most contractors who are trying to keep their operations running and profitable.

With all of the uncertainty surrounding the ongoing COVID-19 pandemic in 2020, the construction industry has tried to maintain a sense of normalcy despite being faced with unexpected challenges. Some of these challenges include implementing new safety protocols, cancelled or delayed projects, as well as unexpected cost expenditure related to purchasing more PPE and implementing additional safety measures.   Others have had to look to the Government for capital relief. Despite these challenges, the construction industry as a whole has shown the resilience it takes to keep moving forward to get the job done.

No one could have predicted the “New Normal” which 2020 as become, but the toll it has placed on contractors’ balance sheets across the country is causing concern.  There is a lack of available cash for companies as they burn through savings to cover overheads to keep their business staffed and the bills paid.

With an already extremely competitive construction industry in Alberta, contractors are looking for ways to relieve themselves of financial constraints (i.e Letters of Credit) and open up sources of capital. One way of accomplishing this is through the use of Surety Bonds.

Surety Bonds are most frequently required in various public sector projects to properly manage taxpayers’ money used to finance construction work. Surety Bonds are also used in the private sector to assist owners with risk management and to satisfy lender’s requirements.

A Surety Bond is a three-party contract that is comprised of the Principal, the Surety and the Obligee.  A Contract of Insurance is a two-party contract between the Insured and the Insurer.

Insurance premiums are set on the assumption that losses will occur, and therefore the premium is based on risk. On the other hand, Surety assumes no losses will occur and the premium is a “fee” for the extension of credit by the Surety to the contractor.

There must be an underlying obligation between the Principal and Obligee before a Surety can become involved.  Therefore, the Surety’s obligation is always secondary to that of the Principal. This is unlike insurance where the obligation of the Insurer is primary.

Surety has a common law right of recovery from its Principal. The Surety has these rights through the indemnity given to it by the Principal. In an Insurance contract, there is no such automatic right between the Insurer and the Insured.

Cancellation provisions differ between a Surety Obligation and an Insurance Contract. Contract Surety obligations cannot be cancelled unless there is a default by the owner (obligee), which would invalidate the contract.  Miscellaneous bonds require strict adherence to cancellation procedures and are often written to be in force until cancelled.  Contracts of Insurance can be cancelled by the Insurer or the Insured.

A Surety Bond allows the contractor to place security on a project without t