Surety bond claims are a common concern for many businesses. In this section, we will try to provide an overview of the most important aspects of bond claims that business owners need to be aware of.
What is a surety bond claim?
To better explain what a surety bond claim is, we need to first clear a common confusion surrounding surety bonds. Surety bonds act similarly to insurance, but they are not insurance to your business. On the contrary, they protect the public (be it a government agency or a client) from breaches of contract and fraudulent practices.
Therefore, a surety bond claim can occur when one party feels that you have violated the terms of the bond agreement in some way. If the claim is found to be legitimate, you can be ordered to financially compensate the claimant up to a certain dollar amount, specified in the bond agreement.
If you are not completely sure about how surety bonds work, we invite you to read more about the topic on our “What is a Surety Bond” page.
Are there different types of bond claims?
Since there are many different types of surety bonds, each claim is also different. Still, surety bonds can be classified in two different groups whose claims share some common characteristics.
License Bond Claims
License bonds are a category of surety bonds demanded from a variety of businesses as part of their licensing requirements. They are required by a federal, state or local government to insure businesses are compliant with different laws and regulations.
A violation of these laws and regulations can lead to a claim against the license bond. The claim can be filed either by the obligee (the body requiring the bond) or by a client who has suffered damages as result of doing business with you.
Construction Bond Claims
The other large category of surety bonds is called construction bonds. They are usually required for work on large construction projects to make sure they are completed as per the contractual agreement.
Construction bond claims can occur under different scenarios. For example, a performance bond claim can be filed if the general contractor defaults or fails to complete the project as promised. A payment bond claim, on the other hand, can happen when a general contractor fails to pay subcontractors in a timely manner. It’s important to familiarize yourself with all types of construction bonds.
How can I avoid surety bond claims?
A surety bond claim is never a pleasant scenario for business owners, as it means paying for legal expenses, wasting time and potentially owing substantial compensation to the claimant. This is why everyone should know how to avoid surety bond claims.
For license bonds, it is imperative that the business owner is up to date with all regulations governing their business. It also means that you should always be honest with your clients. Following these two rules should keep you in the clear when it comes to surety bond claims.
When construction bonds are involved, you should be well aware of all clauses in your contract. You should only enter contracts that you know you are capable of fulfilling properly and on time. Make sure you know what sort of obligation you have for each construction bond you are required to post. If you are struggling meeting a certain clause, it’s better to inform the client and the surety on time, as very often, steps can be taken to prevent the need for filing a claim.
What should I do in case of a surety bond claim?
Even despite your best efforts, surety bond claims can happen, so you need to be prepared for a situation like that.
The best advice experts give in case of a dispute with a client is to document each and every step of that dispute. This way, when the claim goes to court, you can defend your position in the best possible way. In some cases documentation is also important, because the surety underwriter needs to get involved. Surety bonds companies have teams of lawyers which can provide legal assistance and even help you defend your position if they think you haven’t violated your contract.
If you think you are clearly in violation of the contract, you should opt for a settlement, which can save you some time, hassle and prolonged expenses for legal representation.
Remember: It’s best to avoid surety bond claims at all costs
It’s important to reiterate that, regardless of the case, it’s best to resolve disputes outside of court and not turn them into claims. A claim can hurt your business in many ways. Despite causing you to lose money, a surety bond claim can also severely damage your reputation. Some bonding companies will also be less willing to work with you in the future if you have claims in your recent history.
If you want to learn more about surety bonds, be sure to check out our Education Center where you can browse a variety of surety related topics.
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