How COVID-19 impacts surety bond placement

Placing surety bonds has become more challenging with the social distancing precautions underway with the COVID-19 pandemic, but it is possible to do this electronically, says an association representing insurers who write surety bonds.

Surety bonds can now be placed without people physically meeting or mailing paper documents, and they are enforceable by law, Steven Ness, president of the Surety Association of Canada, said in an interview.

“Anyone who is seriously engaged in the surety business in this country has the ability to provide electronic bonds or digital bonds,” said Ness. “And if you are not, my message to you is: ‘The world is not going to sit still for you. Get yourself into the 21st century if you want to keep doing business.’”

Though surety bonds are provided by property and casualty insurers, they are different from insurance contracts in several ways. Surety bonds are three-way agreements for the benefit of the client’s clients. They are not conventional contracts where one party agrees to pay money to a party who supplies something.

With a surety bond, the insurer – in this context known as the surety – writes a bond for its customer, often a construction contractor and known as the “principal” for the purpose of the surety bond. If the principal fails to fulfill the terms of its contract, then the surety (the insurance carrier) might have to make a payment to the “obligee,” which is often a construction project owner (a municipality or real estate developer, for example). Often the construction contractor cannot get the job without a surety bond. One risk that surety bonds are intended to transfer is the risk to a project owner if a contractor fails to finish the job or pay its subcontractors and suppliers.

Although Ontario is under a state of emergency during the COVID-19 pandemic, many types of construction projects are considered essential – and therefore exempt from the workplace shutdowns.

But some brokerages are facing a logistical challenge now in delivering properly sealed surety bonds to project owners and clients, the Surety Association of Canada observes.

“Surety bonds are an interesting animal because they are not contracts,” said Ness. “They are deeds, which means they must be executed under seal. It creates a logistical challenge but we have managed to overcome that.”

The distinction is important in “common law” provinces because a two-way contract is one in which a seller gets “consideration,” or payment, for what it gives the buyer. So a surety bond is not technically a contract because the obligee, the project owner, is transferring its risk without paying a premium. Instead, it is the principal, not the obligee, that pays the premium to the surety.

Traditionally, legal documents were sealed by making some sort of impression in wax or putting self-adhesive wax on to the document, Toronto lawyer Albert Frank wrote in an earlier paper about corporate seals.

Today, several vendors in the market offer software and services that deliver sealed and legally enforceable surety bonds, Ness told Canadian Underwriter Tuesday.

If you want to use those, the Surety Association of Canada has several pieces of advice. The electronic bonding process needs to have:

• Integrity of Content: the parties are assured that the document received is the true document executed and the content has not been changed or altered;
• Secure Access: Only those who are authorized to view or download the document have access; and
• Verifiability/Enforceability – the parties are assured that the document was duly executed by the parties identified and that it is enforceable in law.