What Happens When Someone Files a Claim Against Your Surety Bond?
If you’ve ever had to get a surety bond for your business, you probably know it’s more than just paperwork, it’s a promise. But what happens when someone files a claim against that bond? Let’s break it down in plain language.
Surety 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.
Why Would Someone File a Claim Against Your Bond?
Claims usually happen when:
- You fail to meet contract terms.
- You violate state or industry regulations.
- You don’t pay subcontractors or suppliers.
- You commit fraud or misrepresentation.
Bottom line: a claim means someone believes you didn’t fulfill your obligations.
Where Do Claims Against a Surety Bond Happen Most?
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.
A few smart moves can save you headaches (and money):
- Stick to the rules – Know your bond obligations and follow them.
- Communicate early and often – Surprises are great for birthdays, not business.
- Don’t overcommit – Taking on too much work is a fast track to missed deadlines.
- Stay sharp – Keep up with industry standards so you’re never caught off guard.
Bottom line? A claim can cost you time, money, and reputation. Playing by the book and keeping clients in the loop is the easiest way to stay claim-free.
Final Thoughts
A surety bond claim isn’t the end of the world, but it can be costly and stressful. Stay proactive, communicate often, and stick to your commitments. That’s the easiest way to keep claims off your radar.
