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- Finding Certainty in a Chaotic Market: What’s Next for the Surety Industry
Finding Certainty in a Chaotic Market: What’s Next for the Surety Industry

Introduction
At its core, suretyship is a promise to stand behind another party’s obligation. It is a risk transfer mechanism in which the surety provides a guarantee, typically to a government or obligee that a principal will perform under a contract.
In a stable market, this model functions seamlessly. But today’s market environment is far from stable. Tariffs, broken supply chains, liquidity crunches, and insolvency ripple effects have created uncertainty for an industry built on the promise of certainty. Accordingly, these macroeconomic factors are introducing performance shocks to projects once deemed low-risk, prompting underwriters to reassess their initial assumptions. This evolving landscape is triggering re-evaluation of risk within the surety industry.
Re-evaluating the Contractual Terms
As restructuring activity increases across Canada, the United States, and internationally, sureties should take proactive steps to mitigate default risk before financial distress escalates. A key focus could be reviewing and, where necessary, renegotiating contract terms to ensure they can withstand economic shocks. Working with contractors to identify pressure points and introduce flexible risk-sharing mechanisms can benefit all parties, including principals and obligees. Several contract provisions are especially relevant:
Price Escalation Clauses: These allow contractors to adjust pricing when material or service costs rise unexpectedly. Common since the pandemic, they help mitigate risks from inflation and supply chain disruption.
Taxes and Duties Adjustment Clauses: These permit contract price adjustments when tax or tariff rates change after bid closing, ensuring contractors are not unfairly penalized by policy shifts.
Force Majeure Provisions: These provide relief for delays or non-performance due to unforeseeable events. Sureties should ensure that tariff-related disruptions are explicitly included in the list of covered triggers for the sectors vulnerable to shifting policy goalposts.
Re-evaluating the Underwriting Model
Traditional underwriting approaches, which have traditionally focused on financials, balance sheets, and historical performance, may no longer fully address the complexities of today's evolving market. As the trade environment continues to change, it is important that underwriting practices adapt accordingly. In order to stay ahead and maintain long-term stability, the surety industry may benefit from transitioning from a static approach to risk management to one that emphasizes dynamic adaptation. This shift can begin by considering four strategic imperatives:
Stress-test the Contract: Understanding the language of a contract is no longer enough. Sureties must analyze how contractual terms operate under financial stress, supply chain disruption, or insolvency events. Stress-testing contracts before issuance can uncover hidden exposures and improve underwriting decisions.
Jurisdictional Mapping: Before issuing bonds, sureties should assess the legal landscape in which they may be called to act. This includes analyzing insolvency regimes, creditor hierarchies, and enforceability of indemnity and subrogation rights. Cross-border exposures require particular attention to variations in stakeholder treatment.
Capital Diversification and Reinsurance Strategy: Portfolio concentration in a single sector or geography increases systemic risk. Sureties should diversify exposure across industries, regions, and contract types while leveraging reinsurance to stabilize performance. Periodic stress testing of the portfolio ensures preparedness for the macroeconomic shocks.
Claims Strategy with Legal Agility: Timely and effective claims handling requires internal legal alignment from the outset. Sureties must develop frameworks for early intervention, rapid assessment, and strategic recovery.
Industry Perspectives: How Different Sectors are Responding
I recently spoke with Matthew Newman, Surety Practice Leader and Partner at Purves Redmond Limited, about the ripple effects of today’s trade disruptions on the construction and mining sectors. His view is clear: construction is absorbing the first and hardest blows.
“The immediate impact of tariffs is more visible in construction than in mining,” Matthew observed. This is particularly true because, in mining, especially gold, a different story appears to be emerging. With high global prices and favorable exchange rates, Canadian miners are enjoying a margin tailwind. But as Matthew points out, “Mining only represents a small portion of the surety market. Construction remains the dominant exposure.”
The numbers also similarly align. The construction sector accounted for 15.4% of all business insolvencies in the third quarter of 2024, highlighting its vulnerability to further economic fluctuations.
According to Matthew, cost inflation, supply shortages, and volatile procurement timelines are colliding with rigid contract terms. In response, contractors, squeezed by rising input costs and fixed prices, are adapting in three primary ways:
Reworking supply chains to bypass tariff-heavy sources;
Renegotiating contracts to embed pricing flexibility or secure materials early; and
Pursuing public relief, from grants to tax offsets.
These adjustments reflect a broader industry shift toward strategic risk sharing. Matthew noted that the construction industry’s experience during the pandemic, marked by rapid cost escalations followed by hard-won resilience — may offer a possible roadmap.
During the pandemic years, the construction industry faced an extraordinary period of disruption. This is because the pandemic introduced a set of challenges that were neither anticipated nor accounted for. It fundamentally disrupted the established risk-sharing framework between public procurement authorities and contractors. In many cases, project owners moved to enforce contract provisions and maintain construction schedules without accommodating the evolving realities on the ground. As a result, even well-established contractors, and at times their sureties, were forced to act quickly to avoid severe consequences, including the risk of default. The period served as a clear reminder that rigid frameworks offer little protection in the face of systemic shocks, such as those being witnessed today.
Conclusion
As the surety industry navigates an increasingly unpredictable market, it is clear that traditional approaches alone are no longer sufficient. The evolving economic landscape calls for greater adaptability in risk management, emphasizing flexible contracts and dynamic underwriting strategies.
Standing at the intersection of uncertainty and opportunity, the industry can learn from past disruptions to better position itself for future challenges. By staying proactive and swiftly adjusting to emerging risks, sureties can maintain the stability their stakeholders depend on, even in an unpredictable world.
By Divi Dev. Divi is a restructuring lawyer and the founder of Divi Distressed Investments, L.P., specializing in business rescue and distressed corporate investments advisory. The views expressed are personal.