There’s nothing quite like the sinking feeling you get when you hear there’s a claim against your bond. Despite your best intentions, it’s likely that you’ll face this issue at some point in your company’s lifetime. Making sure you understand the bond claim process and having a plan of action for addressing a claim can help you prevent a hit to your reputation as well as avoid damage to your bottom line.
Here’s our step-by-step guide for handling a bond claim.
What happens when a business has a claim against a bond?
Sometimes a bond claim is unavoidable for a bonded “principal”, even for the most reputable company. The first thing to know is that your surety company has a wealth of knowledge to help you respond to the claim and a team to investigate the matter.
There are many types of bonds that exist. A bond claim means the claimant is alleging you haven’t fulfilled an obligation of yours that may be covered under the bond. However, genuine disputes occur in business transactions regarding the responsibilities between parties which is why surety companies investigate every claim. The surety company needs to determine if the allegations made by the claimant are covered under the bond it issued, and whether you have fulfilled your obligations under the bond. The surety wants to hear both sides of the story and review all of the evidence and documentation before making its determination on a claim.
If a principal believes it is in default under the terms of a bond, it should always notify its surety company itself and prior to a claim being filed on the bond. This proactive approach can be beneficial to all parties and could save costs that the principal may otherwise need to pay. Some bonds require that certain parties meet to try to negotiate a solution before a claim is even filed. These discussions can save the principal from future litigation, so this is a good idea even if the bond doesn’t require it.
When a surety receives notice of a claim against a bond, the surety company will respond to the claimant and formally acknowledge receipt of the notice. Then the surety will begin an investigation into the allegations the claimant made to better understand the nature of the claim..
If the surety company determines that the claim is valid, the surety company informs the bonded principal of its findings and notifies the principal of its obligations under the indemnity agreement and bond. The surety company must fulfill its obligations under the bond so, if the principal has not resolved a valid claim itself, the surety may satisfy its obligations under the bond directly with the claimant. If this happens, the surety company will seek reimbursement from the principal. The claim loss can be up to the full penal sum of the bond, and possibly more if attorney or consultant fees in excess of the penal sum are covered under the bond.
If the surety determines that the claim is not valid, the surety company will deny the claim in writing by sending a declination letter to the claimant.
Can I dispute a bond claim?
While the surety company has “skin in the game,” it’s important to understand that it is a neutral party tasked with investigating claims and determining its obligations under the bond. That’s why it’s so important for the principal to cooperate fully with the claims investigation. The most beneficial way the principal can dispute a claim is to maintain open and candid communication with the surety. If the principal disputes the claim, it will need to communicate that to the surety and provide a thorough explanation of the dispute and documentation to support its position.
Bond claims, if valid, put both the principal and surety company at risk of financial loss. How can a bonded principal protect itself?
Protecting your company against a bond claim
The best way to protect yourself from a bond claim is to make sure you are fulfilling the obligations covered under the bond. Make sure you understand the requirements, rules, and regulations required of you and understand the terms of the bond that was required of you — and don’t hesitate to reach out to your bond agent with any questions.
In the event of a claim, communication and proper documentation are key to proving your position on the claim. Protect yourself against a bond claim by keeping meticulous records throughout a construction project or other bonded obligation. If a claim is filed, review the claim, prepare your documentation, respond to the surety’s requests and be aware of your indemnity obligations to the surety.
Related: "The ABCs of Surety Bonds: What’s the difference between surety bonds and insurance?"
*This article is for information purposes only, and not intended to be legal advice. You may wish to seek the advice of counsel, as the handling of surety claims may vary based upon the facts and circumstances of the claim.
Beth Harbeck is the Midwest Regional Vice President of Commercial Surety for Old Republic Surety Company. She is located in West Des Moines, IA. Beth has been in the surety industry for 20+ years. She worked for Merchants Bonding Company and Nationwide Surety and Fidelity before joining Old Republic Surety Company in 2014. Beth loves to travel, entertain, and watch sports.