Parties involved in surety bonds do whatever is possible to avoid claims. That theory is not based only on the claim process, which is extremely complex and time-consuming. Claims can also have a negative effect on the principal or contractor. This negative effect could compromise the principal’s business in more ways than one. Below, you will discover more information about the after-effects of a bond claim.
Surety Bond Claim – What Is It?
As mentioned above, the parties involved in a claim never way to file a claim. In fact, they will avoid the process if at all possible. The best way to avoid bond claims is through negotiations. With that said, sometimes a claim cannot be avoided for one reason or another. If you are a party in a surety bond, you need to know the potential negative effects related to claims. First, you need to know what the term “surety bond claim” means.
A surety bond claim is a complaint that is filed by one of the parties involved in the contractual agreement. In most cases, the claim will be initiated by the obligee (an individual, a business, government entity, or organization). If the obligee feels that he/she has been wronged by the principal on a construction project for example, he/she can file a claim against the construction surety bond. A claim can also be filed if at any time the principal does not heed to the rules and regulations set forth by the government.
The purpose of a surety bond is to protect the obligee from fraud and other intentional violations. However, unintentional factors can also warrant a claim.
What Happens When A Bond Claim Is Filed?
The obligee, who will be referred to as the claimant, is generally the party that initiates a surety bond claim. To initiate the process, the obligee must file a claim against the surety bond that was obtained by the principal. The principal will usually post a bid bond before the job is awarded. Once the obligee awards the job to the principal, then it is common for the hiring party to ask for a performance bond for 50% and a labour and material bond for 50%.
The cost of construction surety bonds is usually 1% for performance bond and labour and material bonds. Bid bonds are usually issued for free by your broker/agent.
The surety company holding the bond will then start an investigation into the claim. This process is necessary to determine if the claim is valid or invalid.
The principal may be penalized because the claim was filed even if it is determined to be invalid. Any costs incurred during the investigation will become the principal’s responsibility. If the surety company finds in favor of the claimant, the claim will be considered valid. In this case, the surety will reach out to the principal in an effort to resolve the issues. The principal will have the option of responding to or resolving the claim.
The claim will remain open until the principal compensates for the damages. If the principal fails to compensate the claimant, the responsibility will fall on the surety company. The surety company will then seek compensation for damages from the principal.
How To Go About Making A Claim
There are really a number of reasons that one would file a claim on a surety bond. Not only this, but there are a number of different bonds, which will be issued in different situations. Luckily, the entire process is not as complicated as surety bonds as a whole. Here is how to go about filing a claim:
Step One
Find out who bonded the individual that you are trying to file the claim against. This information can usually be found on the state’s licensing board website.
Step Two
Get in touch with the bonding company’s claims department.
Step Three
Follow the instructions of the claims department to file the bond. This could include anything from submitting a letter to providing other documentation.
Step Four
Keep close contact with the claims department while waiting to hear back from the surety issuer.
Step Five
The investigation should begin. This is where the party or parties will determine if the claim can be merited. Keep in mind that there are some situations where the surety company will give the principal time to satisfy the claim. If the principal doesn’t do this then the surety company will go ahead and satisfy the need, but the principal will be punished for their oversight.
Understanding The Different Surety Bonds Claims
From reading this far, you already know that all surety bonds are different. Not only are different surety bonds issued in different situations, but the overall price of these bonds is different. Well, guess what? The claims can be different as well. There are a number of reasons that someone can choose to file a claim against for bond, but there are some reasons that are much more common than others.
For instance, in the construction industry, it is extremely common for someone to file a claim on a payment bond because the subcontractor or contractor didn’t pay for the needed supplies. In Canada, it is also fairly common to see construction companies and homeowners file claims because a job didn’t get completed on time. Something as little as not finishing the job within the set budget can cause a claim to get filed against your bond.
All that being said, there are also other industries and areas in Canada where claims can be made on certain surety bonds. Just take a look at the examples below.
Motor Vehicle Deal Bonds Claims – A customer can file a claim against a dealership in the event that they are not supplied with a title upon purchasing a vehicle, new or used. Claims can also be filed if the sale of the vehicle isn’t reported if the state of the vehicle is misrepresented during the sale, if the vehicle has been stolen, or if the sales tax hasn’t properly been kept up with.
Fidelity Bonds Claims – The most common reason that someone might file a fidelity bond claim is in the event of employee theft. This is a claim that an employer would make rather than a consumer or client.
Mortgage Bond Claims – Mortgage bond claims can be made in the event that fraud takes place. Other common reasons are RESPA violations, discrimination, and overcharging.
Court Bond Claims – In Canada court bond claims are oftentimes filed when estates or assets are mismanaged, when trust funds are spent, and when obligations set by a court of law are not met.
Lost Title Bond Claims – Lost title bond claims are probably the next most common types of claims made next to the construction claims. And, this is because they have to do with vehicles. These claims can be made in the event that a vehicle is stolen or if someone else has made illegal ownership claims on a vehicle that you currently own. This might sound strange, but it happens more often than one might imagine.
At the end of the day, there are tons more bonds and tons more reasons as to why claims can be filed against the bonds. The ones mentioned above are just the most common in Canada and were specifically listed just to give you an idea as to why someone might file the claim in the first place.
Also, it would be recommend that you explore business insurance in addition to attaining bonds. Insurance claims are different from bond claims are they are underwritten differently.
If you would like to learn more or speak to a broker or agent regarding your bonding needs, you can contact us or request a quote.
