The surety claim process: What you need to know
What happens if a claim is made on my surety bond? As an accredited surety company, we’re here to help answer that question.
First and foremost, don’t worry! It’s not the end of the world. But some steps and processes must be followed when a claim has been made on your bond, due to obligations that each party owes to others. Let’s discuss what you need to know about the surety claim process.
Different types of surety bond claims
There are three different types of bond claims:
Bid bond claim: A bid bond claim is made by an obligee against the surety company. A bid bond is a guarantee provided to a project owner by a contractor along with their cost estimate. The bid bond guarantees the winning bidder will enter into a contract and provide payment and performance bonds to the owner. If the contractor fails to do either of these, the owner can make a claim on the bid bond.
Payment bond claim: A payment bond claim is made by a subcontractor or a supplier who has not been paid for labor and/or materials they provided to the project.
Performance bond claim: A performance bond claim is made by an obligee when the principal has failed to comply with terms and conditions of the contract executed by the principal and obligee. Claims related to bid bonds and performance bonds are similar, but bid bond claims occur prior to the parties entering into a contract, and performance bond claims occur after the contract has been signed.
Want to learn the basics of surety bonds? Read our popular article: What is a surety bond?
The investigation process begins after a claim is made
For each of the aforementioned claims, the surety must promptly begin its investigation process to determine the claim’s validity. The surety will acknowledge receipt of the claim in writing and request additional documentation from the party filing the claim. They will also request that the principal forward their detailed position on the claim and all relevant documentation and evidence.
The foundation of decision-making
Facts are the foundation of decision-making and are integral to the surety claim process. The surety makes decisions based on the facts that occurred during the construction project. The principal’s prompt responses, open communication and cooperation, and detailed documentation will greatly assist the surety in understanding the issues and properly addressing the claim. While the burden of proof lies with the claimant, it’s crucial to have the principal’s cooperation and transparency as well.
Principal has primary obligation
Cooperation from the principal is crucial because, ultimately, the principal is obligated to resolve the claim. The principal enters into contracts directly with owners (to build projects), with subcontractors (to pay them for performing work), and with suppliers (to pay for materials being supplied). Performance and payment bonds are written to provide secondary protection that the principal will perform underlying obligations on contracts. In turn, the surety is providing a secondary promise that its principal will perform its obligations. This promise is reinforced through the indemnity agreement in which the principal agrees to defend and make whole the surety for any losses incurred by the surety.
Don’t recall who the “principal” is in a surety bond contract? Read: What is a surety bond?
It is imperative that the principal provides their position and the evidence that supports it. No response, or lack of a valid response, means the principal can be liable for requested damages. This can cause the surety to settle the claim and collect damages from the principal. A timely response from the principal is imperative as the surety has a duty of implied covenant of good faith and fair dealing when investigating bond claims, and must respond to the claim promptly.
What happens if there’s a dispute?
Claim disputes can happen. While we like to see parties reach agreement to resolve disputes, that doesn’t always happen. The surety owes duties to all parties and ultimately can’t decide which party is correct when matters are truly in dispute. Sometimes mediation, arbitration or litigation may be needed to resolve disputes. That’s why communication and cooperation are important, because the surety is unable to approve a claim when the evidence presented supports the principal’s position that valid defenses to the claim may exist.
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The surety claim process, simplified
Claims can be complex, but they can be solved in a simple manner.
The surety must fully investigate to understand the principal’s position and respond accordingly to the claim. Without cooperation, the surety may need to resolve the claim and pursue recovery from its damages under the indemnity agreement with the principal.
Every surety bond claim is different and may have its own path. As your business partner, UFG Surety is here to help you along every step of the way. Contact us to learn more.
