Canadian Accredited Insurance Broker (CAIB) Three Practice Exam

Which of the following defines Suretyship?

1. A promise to repay a loan

2. A guarantee of performance by one entity for another

3. An insurance policy for personal property

4. A legal contract between two parties

The correct answer is: A guarantee of performance by one entity for another

Suretyship specifically refers to a situation where one party (the surety) guarantees the performance or obligations of another party (the principal) to a third party (the obligee). This concept is commonly seen in construction projects and other scenarios where one party needs assurance that contractual obligations will be fulfilled. In this context, the surety often provides a bond that can be invoked if the principal fails to perform. The emphasis here is on the guarantee of performance rather than merely a legal contract or insurance policy. While options referring to loan repayment and insurance for personal property may involve contractual elements, they do not encapsulate the essence of suretyship, which is inherently about assuring fulfillment of specific commitments made by one party on behalf of another.