What to Consider When Making a Bond Claim

A bond claim is a formal request for payment or performance made against a surety bond. These financial guarantees are common in construction, ensuring contractual obligations are met. When a bonded party fails to uphold agreements, leading to financial loss or project delays, affected parties can pursue a claim to seek compensation from the bonding company.

Understanding Bond Claims

A bond claim involves three distinct parties: the principal, the obligee, and the surety. The principal is the individual or entity that purchases the bond and undertakes the primary obligation, such as a contractor on a construction project. The obligee is the party protected by the bond, often a project owner or a subcontractor, who requires the bond as a form of security. The surety is an insurance company that issues the bond, guaranteeing the principal’s performance or payment to the obligee.

The surety essentially backs the principal’s promises to the obligee. Unlike traditional insurance, which protects the policyholder, a surety bond protects the obligee from the principal’s failure to perform.

Performance and payment bonds are common types of bonds that lead to claims. A performance bond ensures that a contractor will complete a project according to the contract’s terms and specifications. Performance bond claims arise when a contractor fails to finish work, performs substandard work, or does not comply with specifications. A payment bond, conversely, guarantees that subcontractors, laborers, and suppliers involved in a project will be paid for their services and materials. Payment bond claims occur when a general contractor fails to pay subcontractors or suppliers.

Gathering Essential Information for Your Claim

Before initiating a bond claim, gather all supporting information, documents, and evidence. This helps substantiate the claim and streamlines the process. Begin by identifying the surety company and obtaining the bond number, found within original contract documents or project records.

Collect all relevant contractual agreements. This includes the original contract between the principal and the obligee, any subcontracts, and purchase orders. These documents outline terms, scope, and payment schedules, establishing the framework for the claim. Also gather evidence of breach or non-performance, which can include:
Daily logs detailing project progress
Written correspondence such as emails or letters regarding issues
Photographs of deficient work
Inspection reports

Quantify damages from the principal’s failure to perform. This evidence can include invoices for unpaid work or materials, payment records, and estimates for repairs or completion by another party. Accurate financial documentation helps demonstrate the extent of the loss incurred. Collect any notices previously sent to the principal, such as notices of non-payment or default.

Notice requirements are a prerequisite for many bond claims and include specific timelines and methods for delivery. Many states require preliminary notice to secure the right to make a bond claim, even if not explicitly mandated by the bond. These notices inform the principal and surety of potential issues and the claimant’s intent to seek payment or performance. Adhering to these deadlines, which range from 20 to 90 days after furnishing labor or materials, is important to preserve the claim. Failure to provide timely and accurate notice can invalidate an otherwise legitimate claim.

Initiating the Formal Claim Process

Once all necessary information and supporting documents have been gathered and organized, the next step involves formally submitting the bond claim. This requires attention to detail and adherence to the surety’s requirements. Claimants prepare a claim package, including a formal written claim, often on a specific form provided by the surety. This form details the claim’s nature, amount owed, and parties involved, referencing collected evidence.

The claim package should include substantiating documents, such as:
Copies of contracts
Invoices
Proof of services or materials
Evidence of the principal’s non-performance or non-payment

The goal is to provide the surety with a clear and complete picture of the claim. Sending the claim via certified mail with a return receipt requested is a recommended method, ensuring verifiable delivery to the surety and other required parties, such as the general contractor and project owner. Some sureties also offer online portals for submission.

Adherence to final deadlines for claim submission is necessary. These deadlines are dictated by state statutes or the bond agreement and range from 90 days to one year from the last date labor or materials were supplied. Missing these deadlines can result in the loss of the right to pursue the claim, regardless of its merit.

After submission, claimants should anticipate a confirmation of receipt from the surety. This might be an acknowledgment letter or initial communication from a claims representative. The surety will open a claim file and begin an internal review. This initial contact confirms the claim package receipt and outlines any next steps the surety may require.

Navigating Claim Resolution

After a bond claim has been formally submitted, the surety company initiates an investigation to assess its validity. This process involves a review of all submitted documentation, including contracts, invoices, and evidence of the principal’s default. For performance bond claims, the surety might conduct site visits or inspections to evaluate work status and quality. The surety communicates with both the claimant and the principal to gather information, clarify facts, and understand each party’s perspective.

During this investigation, the surety evaluates the liability and damages to determine if the claim is valid under the bond’s terms and applicable laws. The surety’s goal is to resolve the claim while protecting the interests of both the obligee and the principal. This phase can take several weeks to several months, depending on the complexity of the claim and the responsiveness of the parties involved.

Outcomes of the surety’s review vary. The surety may acknowledge the claim’s validity, request additional documentation to complete their assessment, or offer a settlement to resolve the matter. If the claim is found to be invalid or outside the bond’s scope, the surety may deny it. Reasons for denial can include insufficient evidence, failure to meet contractual terms, or a determination that the principal is not liable.

If a settlement is not reached or the claim is denied, the claimant has several options to pursue resolution. These can include alternative dispute resolution methods such as mediation or arbitration, where a neutral third party facilitates discussions or makes a binding decision. As a last resort, litigation may be pursued, which involves resolving the matter through the court system. Throughout this resolution phase, maintain continued communication with the surety and document all interactions and information exchanged.