It's very important to understand how surety bonds work and how claims are filed, especially if you are the individual who is bonded. This is likely to be the case in a situation where you have been required to purchase a license and bond by the state you reside in, as a condition of doing business within state borders. When someone makes a claim against your surety bond, it is a legal action which the obligee in a bond agreement is entitled to take, so as to recover funds which that party may have lost because of your actions.
Bonds don't work in the same way that insurance does, since insurance protects the business itself, whereas the bond protects the clients and customers of that business. Any bond is intended to be an agreement between the individual purchasing the bond (the bond principal), the customer or the public party (the bond obligee), and the surety company which sells the bond to the principal, and is required by law to make good on a claim filed by the obligee.
When an obligee feels that he/she has been defrauded by a business person, or that the business has failed to live up to the terms of the bond agreement, it has the legal right to file a claim against the bond to recover damages. If the claim is found to be valid and is carried out successfully, the full amount of the bond value may be awarded to the obligee filing the claim. Although the surety company makes the initial payment to the obligee, it will then be within its rights to pursue the principal who caused the claim to be filed, to recover the full amount of money it paid out to the obligee.
Construction Surety Bond Claims
Construction surety bond claims are one of the most popular types of claims since it's very easy for a disagreement to rise between obligee and principal, which in this case is the contractor providing services. Also known as contract bonds, construction bonds are generally purchased when the contractor is required to work on a specific construction project, and the bond serves as a guarantee that the work will be done as specified and within all regulations required by state agencies. If any of the terms of the construction bonds are not fulfilled by the contractor, the project owner can file a claim against the bond to be reimbursed.
There are several other types of bonds associated with the construction industry, for instance, a performance bond, and a payment bond, which guarantees that all subcontractors on a construction project will be paid in a timely fashion. As mentioned previously, construction bonds are one of the most popular types of bonds where claims are filed against a contractor, but they are by no means the only kind of bonds that have claims filed against them. License and permit bond claims are also very common, and they are filed for much the same reason, i.e. the business person who is bonded, has failed to live up to the terms of the bond and to provide adequate services to the obligee.
Preventing Claims From Being Made Against Your Bond
It is definitely to your advantage to avoid having a claim made against your surety, because they are time-consuming, financially expensive, and have the potential to ruin your business reputation. The obvious best way of avoiding claims against your bond is to simply live up to all obligations referenced in the surety, and never take shortcuts which might be called into question later.
Licensed businessmen should always adhere to best practices of their respective businesses, and should be fair and honest in their dealings with clients. It's also a good idea to stay abreast of all developments within your specific industry so that you never find yourself in violation of industry standards. In the case of construction bond claims, being meticulous and paying close attention to details will generally be sufficient to protect yourself against any construction surety bond claims.
You should also have a very clear understanding with the project owner before any work begins so that you don't unintentionally fall short of expectations. It's also a good idea to avoid accepting too much work if you're a business person or a general contractor so that you find yourself in the position of being unable to live up to agreed-upon terms. By communicating often with the project owner, you should both be well aware of the project status.
If any difficulties do arise, these should be communicated immediately with the project owner, rather than waiting until the end of the project when you might get an unpleasant surprise. The best policy is always to defuse any possible issues which might lead to a claim against your bond because having to pay the amount of any bond claim could be ruinous to your business. Want to learn how to get your business insured and bonded?
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