What to Expect if a Surety Bond Claim is Made

Surety bonds are a vital part of the construction and contracting industries, providing financial assurances that contractual obligations will be met. However, despite best intentions, situations can arise where a claim against a surety bond becomes necessary. Whether due to non-performance, failure to pay subcontractors, or other reasons, it's important to know what you can expect during the surety bond claims process.

Understanding the Basics of Surety Bonds

Before diving into the claims process, it's essential to understand how surety bonds work. A surety bond is a three-party agreement involving the principal (the contractor or obligated party), the obligee (the entity requiring the bond, often a project owner or government agency), and the surety (the bonding company providing the financial backing).

The Claims Process:

Step 1: Initial Claim Assessment

When a claim is filed, the surety's first step will be to conduct a thorough assessment, which involves:

• Reviewing the Bond Terms: Understanding the specific terms and conditions of the bond is critical. What obligations were outlined? What constitutes a breach?
• Gathering Documentation: Collecting relevant documents that include contracts, project schedules, correspondence, and any previous notices of default or performance issues. These documents are necessary to provide a comprehensive evaluation.
• Consulting Stakeholders: The surety will engage with the principal, oblige, and any other involved parties that may provide valuable insights into the circumstances leading to the claim.

Step 2: Investigation and Analysis

Once the initial assessment is complete, the surety will move into the investigation phase. This will include:

• Site Visits: Visiting the project site to assess the situation firsthand can provide context that documents may not fully capture.
• Interviews: Speaking with project managers, subcontractors, and other key players will help the surety uncover critical information about the issues at hand.
• Financial Review: If the surety suspects financial instability is an issue, a thorough review of the principal's financial health, including credit reports and financial statements, may be necessary.

Step 3: Final Decision

After gathering and analyzing all relevant information, the surety will make a decision regarding the claim. The options typically include:

• Denial of the Claim: If the claim lacks merit or does not align with the bond's terms, the surety may deny the claim outright.
• Settlement: In some cases, it may be more prudent to negotiate a settlement with the oblige to avoid lengthy legal battles.
• Performance and Completion: If the claim is valid, the surety may step in to complete the project or hire a replacement contractor to fulfill the obligations. They may also cut a check for the full bond penalty.

Navigating surety bond claims can be intimidating, but knowing what to expect can make the process a whole lot easier. Our surety professionals at AssuredPartners provide exceptional support to clients nationwide for their various surety needs. Contact our team to learn more.