The claims process is a crucial part of any bond. It�s important to understand what happens when a claim is filed against a bond so that you can know your responsibilities and what�s expected of each party involved. Here�s what you need to know.
What is a Surety Bond?
A surety bond is a legal contract that brings together three parties in a legally binding agreement. The purpose of a surety bond is to protect one party in the agreement against financial loss resulting from the actions of another party, through a third party�s issuance of a guarantee. These three parties are referred to by the role they play in a surety bond agreement:
- The obligee is the party that gains protection by requiring the purchase of a surety bond.
- The principal is the party required to obtain the surety bond for the protection of the obligee.
- The surety is the company that underwrites and issues the surety bond.
Surety bonds are used in many industries. They�re broadly categorized as:
- License and permit bonds, which are required as part of the process of licensing or registering a business and guarantee that the principal will conduct business in a lawful and ethical manner.
- Contract bonds, which guarantee that contracted work will be done in accordance with all contract terms and provisions and provide financial protection for the obligee in the event of contract default or non-performance.
- Court bonds, which are required by a court in specific situations to guarantee compliance with court orders, protect property belonging to plaintiffs and/or defendants in contested legal matters, or ensure that fiduciary responsibilities live up to their obligations.
What Can Trigger a Claim on a Bond?
The principal�s violation of the terms and conditions of a surety bond can trigger a claim on the bond. For example, a construction contract might violate the terms of a contract bond by failing to complete the work as specified in the bond. The obligee would suffer a financial loss from having to hire another contractor to complete the project. That would constitute grounds for filing a claim against the contract bond.
As another example, if a court-appointed executor of an estate embezzled funds from the estate, causing a financial loss to the beneficiaries of the estate, the court, as obligee, would have grounds to file a claim against the bond to offset that loss.
The best way for any principal to avoid claims being filed against a surety bond is simply to avoid violating the terms and conditions of the bond in the first place. As they say, an ounce of prevention is worth a pound of cure.
What Does the Claims Process Involve?
The surety�s first priority is to ascertain the validity of any claim submitted against the bond. The surety will investigate the matter and reject the claim if it is determined to be illegitimate. If the claim is found to be valid, however, the surety will ensure that the claimant is compensated.
The ultimate burden of paying claims belongs to the principal, as virtually all surety bonds include a clause that indemnifies the surety. In some cases, if a settlement cannot be reached, the surety will simply inform the principal of the amount that the principal must pay directly to the claimant. In other cases, the surety will pay the claimant initially and then collect reimbursement from the principal. Sometimes, the surety will make an arrangement that allows the principal to reimburse the surety in installments over a specified period of time.
Have Bond Questions?
There are a number of factors to consider when choosing a surety bond provider. The agents at Single Source Insurance are experienced and happy to help answer your questions. Contact us today to see what our experienced surety bond professionals can do for you.