Surety Bond Claims Guide
Estimated Read Time: 7 minutes
05-27-2022
Let’s go over what a surety bond is before discussing claims. A surety bond guarantees restitution to a person or entity that is financially harmed when the principal breaks one or more conditions of a license, permit, or contract. The principal is the party required to purchase the surety bond. The surety company then makes a financial restitution guarantee, in the form of a surety bond, to the obligee (party requiring the bond).
In a perfect world, everyone would work in compliance with the obligations of their license, permit, or contract—we know that is not always the case. Even when the principal is aware of what is expected of them, it doesn’t mean they will always be able to avoid conflict or financial trouble. That is why obligees require a surety bond as a method for an injured party to be reimbursed for damages when the principal cannot or will not do so.
Why Would a Claim Be Filed?
For the most part, it comes down to money. Someone sustained a financial loss due to the principal's actions and the principal has failed to make amends. Fortunately, the damaged party can file a claim with the surety company.
There are other insurances that provide coverage for damages—like a liability policy that covers damage to others and/or their property—but these other insurances have crucial exclusions. Surety bonds are able to fill these gaps in coverage for the benefit of damaged parties.
The reasons why a claim can be made depends on the surety bond (of which there are thousands), and each bond provides coverage for the numerous ways a principal can cause damages.
| Bond Type | Reason for Claim | Best Way to Prevent |
|---|---|---|
| Bid | Failing to sign contract; Failing to meet bid requirements | Start project for the amount of the bid |
| Performance | Failing to comply with obligations of contract(s) | Finish project on-time and to contract specifications |
| Permit | Failing to complete the work under the permit; Leaving equipment on job site; Leaving site in a worse condition than prior to work | Adhere to permit specifications; Return work site to normal |
| License - Contractor | Incomplete work; Faulty materials; Poor workmanship; Job abandonment; Property damage | Adhere to license and contract specifications |
| License - School | Failing to refund students for tuition for incomplete education | Provide education that was paid for; Refunding unused tuition |
| License - Financial Institution | Embezzle client’s funds; Misrepresentation or concealment | Perform financial duty as expected; Maintain accurate records |
| License - Motor Vehicle Dealers | Failure to transfer title; False sales information; Tampering with odometer; Failure to pay registration, title, or other fees; Selling stolen vehicles | Transfer clean title; Maintain accurate records; |
| License - Generic | Failing to comply with obligations of the permit, license, contract, etc. | Perform your role as expected and to industry/regulatory standards |
| Tax Obligation | Failing to pay taxes to Obligee | Pay taxes on time in full |
| Probate: Administrator/Executor Convservator/Guardian | Negligence; Fraud; Intentional misuse of assets | Manage assets in the best interest of involved parties |
| Court | Failing to abide by state, county, or city laws | Adhere to rules and regulations pertaining to your position |
| Fidelity | Theft or injury of client’s personal or business property | Prevent damage or theft of client’s property |
Is There Any Way to Prevent a Bond Claim?
Simply complete your responsibilities with integrity and proper record keeping and there can never be a legitimate claim made against you. If you make an error in judgment and fail to correct your mistakes, then you may have a claim made against you.
Once a complaint has been made, there are ways to combat false allegations or mitigate legitimate grievances. Complaints can follow many paths on their way to being a valid claim, so let’s explore some key junctures.
- Do your job
This is pretty self-explanatory. When you receive a license, permit, or contract, you will have to follow industry practices, applicable legislative regulations, and contract stipulations.
- Keep detailed records
Not all surety bond requirements start with a permit or contract, but in those cases having well-defined expectations and terms is necessary. Keeping progress logs, receipts, communications, titles, etc. in a file or data management system will allow you to address issues and complaints with evidence in a timely manner.
- Open lines of communication
Complexities and setbacks are inherent, so address them directly with clients and/or interested parties. Respond to people in a timely fashion. Giving people proper courtesy and respect can be reciprocated when you’ve made an actual mistake and need to correct it—will it escalate or will you be given grace?
- Take complaints seriously and make corrections right away
If there is a grievance about the quality of your work or whether you are in compliance with your obligations, in almost every case, you will hear about it first. If it’s a customer, hear them out and make any corrections needed. If it’s the obligee, address the order to get back into compliance.
- Take advantage of the mitigation process
The obligee may have a process for investigating formal complaints. Oftentimes, the obligee will provide mitigating steps and/or take corrective action, thus alleviating the complaint. You need to present your evidence and make your case to the regulator. Weigh out if furthering the dispute is cost-effective as opposed to making a deal.
- Follow directions after the decision of a hearing
The obligee may choose to hold a hearing to determine whether the offense action was a violation of legislation or license/permit obligations. If you are found in violation, corrective action may be prescribed. Correcting the violation could resolve the complaint and prevent further disciplinary action, which may include a claim on your bond.
When Can a Bond Claim Be Made?
Surety bonds have a certain time period when an action that can lead to a claim can occur: the bond’s active and cancellation period. The bond’s active period is from the bond’s effective date to its cancellation date. The cancellation period occurs once the obligee receives the cancellation notice from the surety company, but extends the liability typically between 30-90 days. This means any infraction that occurs during that period can still be eligible for a bond claim.
Most bonds have a period of time that allows for claims to be filed once the bond is canceled, keeping in mind that the offensive action must have occurred during the bond’s active term. These ’tails’ are commonly 1-2 years after the date of the incident but can vary depending on state legislation or the obligee’s specifications.
Surety Bond Claim Process
An injured party can seek compensation from the surety bond by filing a claim with the surety company at any time, with the exception of several jurisdictions that require an investigation first. Typically, the bond claim will occur after a court case or regulator investigation and ruling.
When Jet receives a claim on one of our surety bonds, our team will look into the claim allegation to make sure that:
- you aren’t being falsely accused, and
- the claim falls within the bond’s coverage
In most cases, Jet will receive the notice of claim from the obligee, court, damaged party or their lawyer. Jet will reach out to you immediately concerning the claim. Do not assume Jet has been notified if you receive notification of a bond claim, contact us immediately. Any evidence that you have for your defense should be gathered and sent our way.
If you have already gone through a complaint process or investigation by the obligee, chances are the bond claim will be determined valid. Courts and regulatory agencies are supposed to provide an unbiased and professional ruling and Jet will take their determination seriously, but not as absolute when reviewing a bond claim.
If Jet finds the claim to be valid, per the bond obligation, we will have to pay out the claim for the damages. Surety bonds all have a set bond limit. The surety company will only pay up to the bond’s limit. In certain cases, legal and administrative fees can be added to the bond claim.
A surety bond is much like an extension of credit. The surety company promises payment to damaged parties for the misdeeds of their insured principals. Once the claim payout has been made by the surety, the principal must reimburse the surety company. The surety company is indemnified by the principal from any losses, meaning the guilt of the principal's actions remains and along with it the financial obligation created. The surety is just a guarantee that restitution is available.
A bond claim payout can be very damaging to the principal. Not only will there be difficulty obtaining a new bond, but obligees often prevent the principal from returning to the job or their profession until the surety bond has been repaid.
