As a business owner, it is important to understand the surety bonds claims process in order to fully grasp the 3-way contract you are entering into. The surety bond claims process is something you ultimately want to avoid, and you can do this by upholding your promise to complete lawful work as required by your city or state. Following guidelines and regulations while also completing the work agreed to is crucial for business owners and individuals looking to avoid having a claim made against their bond.
What is a Bond Claim?
A surety bond claim is a legal action taken by the obligee against the principal when the conditions of the bond or the law are violated. To understand how these claims work, you must understand what a surety bond is in its entirety.
Surety bonds protect the public from misdeeds and frauds of companies or individuals. They are often required by the federal government or individual state governments, guaranteeing truthful and honest business performance. The agreement is set between three parties: the principal, the obligee, and the surety. The principal is a company or organization that needs a bond to work within a particular industry. Usually, the government or other state authorities demand a business to obtain the surety bond as long as they are operating in public.
The surety provides the guarantee for the payment, performance, or compliance of the principal. If the principal fails to meet the requirements of the bond, an obligee can file a claim against the bond. The surety is then responsible for covering all costs associated with the claim and the principal is responsible for reimbursing the surety in full.
Surety Bond Claim Examples
Surety bond claims can be made for many reasons. They differ quite a lot depending on the type of bond. We provide two main surety bond claims examples to help you understand the surety bond claims process.
License and Permit Bond Claims
License and permit bonds are required of businesses and individuals applying for a work permit in their specific state. License and permit bonds guarantee the business or an individual complies with local and federal laws within the industry. If a business violates these regulations, a claim can be made against the bond.
One of the examples can be a motor vehicle dealer bond. If a motor vehicle dealer doesn’t fulfill obligations set by the bond, the state or any other business or individual working with the dealer can fill the claim against the bond.
Motor vehicle dealer bond claims are usually made for these reasons:
- Lost or missing titles with a vehicle purchase
- Non-reported vehicle sale
- Sale of stolen vehicles
- Not paying sales taxes and other related fees
- Not meeting warranty obligations
- Not paying lenders
Construction Bond Claims
Contractors need to obtain construction bonds in order to work on a particular project. These bonds guarantee legal and reliable work performance by contractors. They also ensure a project will be completed within contract limitations and following specific terms set in the agreement. Any contractor’s failure to comply with these regulations can lead to claims. Depending on the construction bond type, a claim can be made against the performance bond, bid bond, or payment bond.
The Surety Bonds Claim Process
It’s important to understand that a surety company has the knowledge and experience to help you respond to the claim and investigate the matter. Sureties don’t accept or discard claims without a thorough inspection. They carefully review the charges and the contract to see whether the principal has fulfilled the obligations from the bond or not. The surety wants to hear both sides of the story and make an objective decision based on evidence.
Thus, we always recommend principals to have open relationships with their surety agency. They should speak with the surety agents about potential claims and keep them updated on all other changes in the business. This can be beneficial to all parties and save the principal from paying large amounts on claims.
The surety bond claim process is quite simple. Once a surety receives a claim, it starts with the investigation straight away. When it determines whether the claim is valid or not, the surety notifies the principal about the decision and potential new obligations.
How to Make a Surety Bond Claim?
Those who are looking to make a surety bond claim usually do so because they feel somewhat deceived. When the public or the state suspects the principal is breaking the terms of the agreement, they have all the rights to file the claim and seek compensation for the contract violations.
It’s easy to file a surety bond claim, but the process might require a thorough investigation. If the obligee wants for the claim to be accepted, all the necessary paperwork and evidence should be in place. The obligee needs to find the company that provided the surety bond. Contact with the surety should be made and the claim handed over properly. After the surety investigates the charges against the bond, it will contact both the obligee and the principal and notify them about the decision.
If the claim gets denied, the surety only notifies the obligee about the decision. However, if the claim is approved, the surety gives the principal a chance to satisfy the claim. If the principal fails to do so, the surety steps in and covers the financial part, which is, later on, paid out by the principal.
How to Prevent Surety Bond Claims?
As we already mentioned, the surety company is a neutral party that investigates claims. That’s why it’s essential to cooperate fully with agents and provide all the necessary information for the investigation. In fact, the best way to dispute a claim is to communicate with the surety every step of the way.
A surety company should be aware of any project problems, so it can estimate whether the principal can honor the bond agreement or not. It’s common for the surety to support the principal with additional financing if it determines there are cash flow problems or issues with subcontractors and suppliers’ payments. With the additional financing, the surety works to protect the business against costly claims.
Preventing and avoiding a bond claim is the best way to go. Claims are harmful to the business, bringing unnecessary expenses and reputation-ruining situations. If you want to avoid all of it, make sure to understand the bond agreement and stay diligent in performing your work. You can’t face a claim when you do everything by the book.
The business that stays honest and fair to the clients and follows industry regulations has nothing to fear. As long as you pay attention to details in the contract, follow deadlines, and provide satisfying results, neither the public nor the state will have the reason to pursue a claim.
Get Bonded with Bonding Solutions
Bonding Solutions has 30 years of experience in the industry and is well-versed in all types of surety bonds. We work hard to build strong and long-lasting relationships with our clients. If you’re looking for a trustworthy surety company to issue the bond for your business, we are here for you. With vast knowledge and experience, Bonding Solutions creates tailored bonds and works with clients to prevent claims and other inconveniences. Call us today to schedule a free consultation or apply online for your surety bond!