Ins and Outs of a Contract Surety Claim
Most projects never get to that point. But given market pressures and the need for contractors to work with several partners during construction, claims do happen.
Here is important information about contract surety claims:
1. What Risks Does a Contract Surety Bond Protect Against for a Bond Holder?Obligees are the bond holders — typically the government agency, private developer or other project owner to whom the contractor owes an obligation to complete the project covered by the surety bond. Obligees want to be protected against the risk of a contractor’s default and from being exposed to claims from downstream parties such as subcontractors and suppliers related to nonpayment. A contract surety bond helps provide those protections for an obligee.
2. What are Some Common Reasons for Claims?Obligees often find themselves in claim situations when the bond principal fails to perform its obligations.
Chief among these obligations is the bond principal’s delivery of the contracted-for project. In the contract surety world, the project most commonly involves physical construction such as a building, or a component thereof, such as the building’s roof. When the bond principal fails to deliver the product, the obligee may seek redress under the bond so they can have the project completed as contracted.
3. What is the First Step a Bond Holder Should Take if They Feel a Claim is Warranted?The first step usually is to alert the surety company of a claim or potential claim. (Note: Bonds may differ in what is required of an obligee to initiate the claims process, and the bond holder should follow these requirements expressly.)
Early and frequent communication ensures parties are informed and can be involved in solving any issues. Proactive communication also can promote dialogue that could result in a solution before the situation spirals. That serves the interests of all parties involved.
4. What Does the Surety Company Consider When Looking at a Claim?The surety company can play an impartial role in the resolution process if there is a conflict preventing project completion. That is because the surety holds independent obligations both to the bond principal (contractor) and the claimant (typically the project owner who holds the bond). The surety is generally obligated to investigate the claim and respond with a reasoned position. The surety usually requests claim-related information from the obligee and bond principal before responding.
5. What are Typical Questions From Bond Holders During the Claims Process?Aside from having logistical questions such as where and when to send notice of a claim, obligees generally are most interested in knowing how the surety can help get the project back on track. Importantly, bond holders want to know how long a resolution will take.
6. Any Example of a Successful Claim and how it Proceeded?
A surety bond, like every contract, is rooted in a promise — a promise that the bond principal will perform in accordance with the terms and conditions of the bond.
The most successful claims are those where the surety can lead the parties to the full potential of that promise, demonstrating the power of the surety bond as a product.
It’s common in the surety bond business for the surety company to field a claim — many times wholly unanticipated — and get the project back on track and delivered in a timely manner. What makes these positive outcomes happen is partnership. In claim situations, partnership means open communication, proactive engagement and a desire to see the promise of the bond realized.
To learn more about the surety bonds available from Westfield, visit the surety page on our website.
By Eric Smith, Westfield Surety