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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 ?

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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.

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  • 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? – VMMF Mar 22 at 19:52
  • @VMMF as I said, they cost less $30,000 insurance premium vs $800 bond premium. – Dale M Mar 22 at 20:35
  • What do you mean bond premium? Isn't any money given by the surety to the obligee later return by the principal to the surety? – VMMF Mar 23 at 1:32

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