This is a question that comes up regularly in my practice, and probably in your daily life as well. Bonding is a form of insurance against a specific range of events or type of event. While there are a number of different types of bonds, usually through an insurer, what most of us think of when we hear the term is the sign on a contractor’s van that says “bonded and insured”, or a claim in an advertisement for security or cleaning services that all of their personnel are bonded.
FIDELITY BONDING
This type of insurance is often termed fidelity bonding, and it protects a consumer, end user, or employer against losses caused by a dishonest employee. Think of the cleaning service people that come to your home or office; people who have unfettered and unsupervised access to all parts of your home or business. Bonding provides assurance that the employer, or more likely the employer’s bonding agency, has conducted background checks on each employee, that consideration has been given to individual’s employment and criminal history, and that if there is an event of loss that there is compensation available. Coverage limits are typically modest, designed to address opportunistic thefts or frauds that might occur. The real security we receive from this type of bonding is the assurance that it has been done.
CRIMINAL RECORDS
We are often asked whether a criminal record or any involvement in the criminal justice system will impede bonding, and the answer is a firm maybe. When bonding insurance underwriters review background checks of potential employees, if a criminal record exists the insurer will consider how the criminal activity may relate to the protections being offered under the bond. If a person was, for example, convicted of a drinking and driving offence five years ago, not a crime involving dishonesty or trust, there may be no reason not to offer bonding for that person to work as in a commercial cleaning agency. In contrast, a criminal record revealing a fraud or theft would raise warning signals.
The reality is a criminal record is not an immediate bar to bonding. It will just raise red flags that cause the bonding insurer to ask more questions and perhaps recommend further protections to support the bond. Those protections may include ensuring employees never work alone or limiting access to valuable or sensitive environments. In fact, it is just as likely that a non-conviction disposition, a discharge or a peace bond, for example, will raise the same red flags, as will a report of dishonesty from a former employer.
OTHER TYPES OF BONDS
There are other types of bonding. Those include performance bonds, contract/bid bonds, and, well, every other kind of bond.
PERFORMANCE BONDS
Performance bonds protect a consumer, for example a property owner who has contracted with a builder to construct a shopping mall. If the contractor fails to complete the job through bankruptcy or lack of resources, the bond, which should be sufficient to offset the cost of the work, may be drawn on to complete the work. Performance bonds are often called on in commercial construction lien matters.
BID BONDS
Contract/bid bonds, also frequently used in the construction industry, ensure owners that the contractor who is the lowest bidder will enter into the contract at the tendered price. Performance and contract/bid bonds also help the contractor by freeing up resources and credit.
EVERY OTHER KIND OF BOND
Every other kind of bond? Well that may include license and permit bonds, often required for service firms like electricians or real estate agents. License and permit bonds make the business owner liable for injuries or damage caused to the public, somewhat like an indemnification. Customs and excise bonds assure the government that taxes and duties will be paid. Court or litigation bonds are more common in some other jurisdictions, but are slowly creeping into Ontario. They protect a plaintiff against the potential liabilities arising from a loss.
Is it the same as insurance? Even though bonding is a type of insurance and is underwritten by insurers, it is not what we would typically think of as insurance.
Bonding is often described as an insurance contract in which an insurer guarantees payment to an employer in the event of an unforeseen financial loss through the actions of an employee. It is a balancing of risk management – putting procedures and safeguards in place – and a guarantee of reimbursement.
Insurance, in contrast, covers liability issues that may arise in the course of work. For example, in the case of a performance bond, if a worker falls from a scaffold and is injured, insurance will be called upon to provide compensation for losses and damages that in some circumstances may get into millions of dollars, whereas the bond would not be called upon unless the fall prevented completion of the work, and the payout from the bond would be limited to the coverage limit or the cost of the balance of the work.
As Sergeant Esterhouse would say, “be careful out there.”
(This is an update of a post on bonding I wrote last year for Mills & Mills LLP. There is lots of other good information there from some great lawyers)
