Performance bonds vs insurance

Question

I'm an engineer and I'm studying for the law and ethics exam to become a registered engineer in Canada. I'm studying a chapter on a book about Bonds where I see:

A bond is a special form of contract, whereby one party, the surety, guarantees the performance by another party, the principal, of certain obligations. The party to whom the obligations are owed is called the obligee.

Reading this link I find:

Insurance: When a claim is paid the insurance company usually doesn’t expect to be repaid by the insured.

Surety Bond: A surety bond is a form of credit, so the principal is responsible to pay any claims.

Typically, the surety requires the principal and its major shareholders to indemnify the surety against any loss. In fact, the indemnity given by the principal is one of the things that distinguishes a bond from an insurance contract

My doubt is:

If as a contractor(principal) you will be required to repay to the surety for any losses that the surety had to pay to the owner(obligee). What are the advantages of a bond over liability insurance where the insurance company pays and the contractor doesn't have to repay anything else that the usual monthly premiums?

Why creating the figure of the surety if the contractor will end up having to pay the surety to compensate for what the surety paid to the obligee anyway? Why not using liability insurance for this?

I don't understand very well the notion of face value of a bond which is "the maximum potential liability of the surety". Does the principal have to pay up to this to the surety ?

Answer 1

Normally insurance covers tort liability for negligence or mistakes or accidents. The person harmed sues you for money damages for harm caused by the incident, the insurance company hires a lawyer to defend you, and if you lose, the insurance company pays the damages award or settlement up to the policy limits. Tort liability is for something you didn't do on purpose. (Some insurance policies count the cost of hiring a lawyer to defend you against your policy limits, others provide the lawyer as an extra benefit in addition to the policy limits.)

A bond normally covers breach of contract liability much of which wouldn't be an insurable loss for things like simply not finishing a job on time and incurring a late charge, or failing to pay a subcontractor that the person hiring you then has to pay. Breach of contract liability is available in a lawsuit without regard to fault if a contract term isn't met. Bond liability covers both intentional and unintentional breaches of contract.

The purpose of a bond it to reassure the person hiring you that you aren't judgment proof, by pushing the risk that you can't afford to compensate the person hiring you for your breach of contract from them to the bonding company. The bonding company in turn gets the right to sue you for any amount it has to pay, doesn't hire a lawyer to defend you in the breach of contract case, charges you a non-refundable fee in addition called a bond premium, and will do some investigation and/or require you to post collateral to make sure that if they sue you that you'll be able to pay them. The bond company's obligation to pay your unpaid breach of contract debt is limited to the dollar amount of the bond.

Think of a bond as a substitute for a security deposit when you don't have the cash on hand to pay the security deposit.

It is customary in jobs managed well to require you to have both bonding and insurance, not one or the other.

Answer 2

Price

Insurance bonds cost considerably less than insurance policies. People get paid for taking risks - if they take less risk they charge less to do so.

To get a $1m bond your bank will require $1m in security and charge say, 1% per 6 months or $10,000.

To get insurance your insurer requires no security but charges, say $50,000 per 6 months.