Commercial Surety Bond Claims: What It Is and How It’s Done

 

Commercial-Surety-Bond-Claims-What-It-Is-and-How-It’s-Done

Every surety seeks zero problems in all of the commercial bonds that they issue. But suretyship isn’t perfect. Nobody is. Mistakes can happen. And that’s why surety bond claims are made.

Since the surety is the one who practically told the obligee (beneficiary of the bond) that “this Principal will finish his obligations. In fact, we believe in him so much that we’re financially backing him up”, the surety will be responsible about the Principal’s (the person who will fulfill the bond’s obligations) default as well.

 

Commercial Surety Bond Claim Defined

A commercial surety bond claim, therefore, is a legal action that the obligee can take on the bond if the principal fails to perform the obligations set forth in the bond.

In commercial surety, it is almost always the obligee who files for a claim or sends a notice of a claim. But sometimes, the individual beneficiaries of a bond may file the claim directly. This often happens with license and permit surety bonds.

 

Receiving a claim

When a surety receives a notice of a claim, the surety has to immediately act on it. Claims are very time-sensitive. They need to be dealt with immediately. In various states, sureties are required to process a claim in the quickest manner possible. This is due to the Unfair Claims Settlement Practices Act. The Act governs sureties in many states.

Claims are usually sent via e-mail or telephone. When a claim is received, this will immediately be forwarded to the surety’s claims department for assessment. The surety is required to do the following once they have received the claim:

  • Acknowledge the claim sent by the claimant by providing the claimant with a proof of claim form
  • Request further information from the claimant
  • Investigate the claim

 

How a claim is handled by a surety

The surety is like Lady Justice – the blindfolded lady with a balance and a sword. She is the symbol of objectivity and impartiality in the judiciary system.

That being said, sureties must make fair, independent investigations. The investigation will be performed without favor or fear.

It is against a surety’s ethical code to prejudice a party by leaning towards one side. Some people might say, “well of course, the surety will make sure that the principal will come out as the winner.”

That can’t be done. Here’s why: if the surety makes a biased decision in favor of the principal, the obligee will subject the surety to a claim of bad faith.

If the opposite happens, meaning the surety will sway the decision for the benefit of the obligee, the surety will lose its right to file for a reimbursement from the principal.

So what does a surety do? Here’s a chronological order of how a surety manages a claim:

  • The surety will first look at the different items of a claim
  • The surety will thoroughly review the bond including all the statutes that governs the commercial surety bond
  • The surety will check the documents that pertains to the claim
  • The surety will talk to the principal to get his or her side of the issue
  • The surety will get the documents that the principal has that pertains to the claim
  • The surety will request further documents or proof from governmental agencies or other third parties
  • The surety will interview all the persons involved in the claim

 

How the surety responds to a claim

After the surety has reviewed the documents (and its validity) and have interviewed all the persons involved, the surety will then check whether the claim is covered by the bond.

If there are arguable issues or issues that are not definite, the surety will negotiate the claim. If the surety found out that the claim is not covered by the bond, then the claim will be denied.

The surety will only determine the amount of the claim if the surety’s entitlement is 100% certain. Only then will the said amount will be offered to the claimant as a settlement.

 

Do you have further questions about commercial surety bond claims? Talk to us! We’re ready to help.

 

 

 

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