A surety bond claim is a complaint against a bond principal (most often a business owner) for violating a contractual agreement or failing to conduct their business within the legal obligations dictated by the obligee (most commonly a state government). If a claim is made on a business, it is expected that the business takes care of the claim. If not, the surety will investigate the claim to determine the validity. If proven valid, the surety will reimburse the consumer losses, up to the full amount of the bond claim. The surety will then look to the bond principal to reimburse the surety for any losses. If the claim is not legitimate, as determined by the surety, the principal may still be responsible for covering any costs associated with the investigation.
The principal signs an indemnity agreement prior to receiving an executed bond, which legally entitles the surety to any assets owned by the business and the personal assets of the business owners and any spouses of the owners. Therefore, if a business goes bankrupt, the business owner will have to personally indemnity their assets to the surety in case of a bond claim payout. Once a claim is paid, the bond claim is closed. It will be expensive and costly to obtain any further bonding coverage. It is important to avoid claims, as once a bond claim is made it is very difficult and expensive to obtain bonding coverage. Even if a bond claim is made, state laws and regulations still require principals to obtain a surety bond in order to perform work or maintain a business license.
When a consumer or obligee feels a bond claim is necessary they will file a claim with the surety. This can be done by verifying the surety who bonded the principal and making contact with the surety, whose contact information is often found on the bond and can also be found on insurance licensing board websites. The surety will investigate the claim and if they feel the claim is valid, the principal will first have a chance to pay the claim. If the principal fails to pay the claim, the surety will step in and pay the claim amount. Then the surety will take the responsibility of being made whole by principal through legal means.
Here are some common examples of bond claim scenarios:
- A contractor fails to complete a construction project in a timely manner and the obligee files a claim on the payment and performance bond to cover the damages resulting from the delays. The surety will investigate why the delays occurred. Currently COVID-19 has caused a lot of delays as State governments have prevented the contractors from working. In this case, if a Force Majeure clause is contained in the bond form language, it will deem the claim invalid. Viral pandemics and government interventions preventing a contractor from completing a project on time are of no fault of the contractor and could not be avoided. If the contractor simply mismanaged their labor force or experienced delays from their vendors and suppliers- those reasons would validate a bond claim.
- A private cosmetology school goes bankrupt mid-semester and leaves the students without a degree or any tuition reimbursement. The students can make a bond claim on the license and permit bond the school was required to obtain prior to obtaining a license to do business. If the school is bankrupt, the students may not have much to be reimbursed from the business. However, the bond indemnifies the school owner’s personal assets. The school may not have any money left for tuition reimbursement, but the owner’s personal bank account, cars, or houses will be used to correct the consequences experienced by students through the bankruptcy.
- A motor vehicle dealer fails to supply a valid title for vehicles sold. If the customer is unable to return the car for a full refund or obtain a valid title, a bond claim can be made on the license and permit bond to be made whole again.
- A contractor bids on a project and is awarded the contract as they were the low bidder. They realize after the bid tabulations by their competitor are read aloud that they made a mistake during the estimating process. If they choose to accept the contract, they will make zero profit and possibly even pay for construction work. The contractor rejects the contract they have been awarded. The obligee can make a claim on the bid bond and be reimbursed 5%, 10%, or 20% of the original bid to cover the expenses with re-awarding the contract to the next lowest bidder.