Performance Bond Claims:

As you may already know, a performance bond is in place to protect the obligee against financial loss should the principal fail to perform their obligations as outlined in the bonded contract. When a claim is filed, the process of investigating the validity of the claim can be timely and judicious. The surety must collect the necessary information from the obligee and principal in order to come to a decision that is fair to both parties. Cooperation and constant communication between the surety, obligee, and principal are fundamental to quickly resolving a claim.

If they determine that the claim is valid, there are a variety of resolutions they may employ.

The most common resolution is called the “Tender Option�. Under this option, the surety and the obligee agree on a replacement contractor to complete the work. The replacement contractor’s price may exceed the remaining balance of the contract, in which case the surety would pay any overruns.

Another common resolution is called the “Takeover Option�. Here, the surety hires construction professionals to complete the job. They could either hire a construction manager to finish the job using the original subcontractors. Or, more commonly, the surety simply hires a completion contractor. Under the Takeover Option, the surety and obligee usually puts a Takeover Agreement in place, since the surety is taking over responsibility for seeing that the project is completed.

Another option that is more reluctantly considered is for the surety to elect not to be directly involved in the completion work. The surety, of course, is still liable for excess cost beyond the remaining contract balance. However, the obligee would initially finance the completion and seek reimbursement later.

Other resolution options exist, though not as commonly applied. Sometimes the surety and obligee might agree on an upfront cash settlement. Other times they may decide to have the original contractor complete the work under additional monitoring.

Payment Bond Claims:

A payment bond guarantees payment for labor and material used for the bonded contract if the principal defaults. This bond would ensure that the suppliers and subcontractors will be paid. Once again, when a claim is filed, the surety must gather information from both parties in order to make a determination. They may request certain documentation including, but not limited to purchase orders, invoices, payment records, and delivery slips. They may also require the completion of certain forms and affidavits.

If it is determined that the principal has in fact defaulted on payment, the surety would pay the claim and pursue the principal for reimbursement.

The claims process can vary from situation to situation. Sometimes the principal admits that they cannot meet their obligations and a claim can be processed and resolved quickly. However, most times the surety must investigate the claim. Be sure to stay in constant contact with the surety throughout the entire process and provide them any requested documentation promptly. With proper communication by all parties, along with reasonable expectations, a claim should be resolved in a fair and timely manner.

Performance Bond Claims:
As you may already know, a performance bond is in place to protect the obligee against financial loss should the principal fail to perform their obligations as outlined in the bonded contract. When a claim is filed, the process of investigating the validity of the claim can be timely and judicious. The surety must collect the necessary information from the obligee and principal in order to come to a decision that is fair to both parties. Cooperation and constant communication between the surety, obligee, and principal are fundamental to quickly resolving a claim.

If they determine that the claim is valid, there are a variety of resolutions they may employ.

The most common resolution is called the “Tender Option�. Under this option, the surety and the obligee agree on a replacement contractor to complete the work. The replacement contractor’s price may exceed the remaining balance of the contract, in which case the surety would pay any overruns.

Another common resolution is called the “Takeover Option�. Here, the surety hires construction professionals to complete the job. They could either hire a construction manager to finish the job using the original subcontractors. Or, more commonly, the surety simply hires a completion contractor. Under the Takeover Option, the surety and obligee usually puts a Takeover Agreement in place, since the surety is taking over responsibility for seeing that the project is completed.

Another option that is more reluctantly considered is for the surety to elect not to be directly involved in the completion work. The surety, of course, is still liable for excess cost beyond the remaining contract balance. However, the obligee would initially finance the completion and seek reimbursement later.

Other resolution options exist, though not as commonly applied. Sometimes the surety and obligee might agree on an upfront cash settlement. Other times they may decide to have the original contractor complete the work under additional monitoring.

Payment Bond Claims:
A payment bond guarantees payment for labor and material used for the bonded contract if the principal defaults. This bond would ensure that the suppliers and subcontractors will be paid. Once again, when a claim is filed, the surety must gather information from both parties in order to make a determination. They may request certain documentation including, but not limited to purchase orders, invoices, payment records, and delivery slips. They may also require the completion of certain forms and affidavits.

If it is determined that the principal has in fact defaulted on payment, the surety would pay the claim and pursue the principal for reimbursement.

The claims process can vary from situation to situation. Sometimes the principal admits that they cannot meet their obligations and a claim can be processed and resolved quickly. However, most times the surety must investigate the claim. Be sure to stay in constant contact with the surety throughout the entire process and provide them any requested documentation promptly. With proper communication by all parties, along with reasonable expectations, a claim should be resolved in a fair and timely manner.

The process ultimately self-adjusts according to the individual case, but this entry should provide some general help and basic orientation. The most important aspects involve communications: immediate, concise, thorough and frequent contact with surety claims personnel; the complete disclosure of information; and continuous, real-time status updates. Surety claims persons are expected and required to treat all parties fairly, ethically, thoroughly and within legally prescribed time frames and in a courteous, professional manner. Give them all the information they request, in addition to what you would like them to have, and do it as soon as possible. Never be afraid to ask questions throughout the process. Like you many, if not most surety claims professionals had never heard of this obscure subject matter until shortly before they got involved with it. So, they are typically tolerant of what you may feel are “stupid� questions.

Search the Internet for situations similar to your own. Talk to your peers to the extent possible. Browse and ask questions here, you may find an answer if you seek only basic information. Oftentimes, the bond obligee, agent, broker or underwriter can help as well, especially with finding the correct claims contact at the surety. If a statutory bond is involved, often the governmental entity requiring the bond can assist.

Depending on the ramifications of the outcome of the claim, you may need to obtain highly-specialized surety claims experts, e.g., legal, accounting or construction consultants. This may not be the time for old buddy who went to law school, but to get on the search engines. Most find that this is money well spent. Look at it this way: Four Minute Oil Change is not the place for the 90,000 mile tune-up, no matter how well-intentioned. Sometimes, you have to go back to the dealer, who put the thing together. If you are facing a tough situation, you should be aware that others involved may consider it routine. Prepare accordingly.

There is a fair amount of printed matter available on the law of surety claims, but much of it concerns complex construction and is prepared for the benefit of the surety itself. These books tend to be weighty tomes, nationwide in scope, written by and for specialists. But they may also be very helpful orienting the layperson and should not be overlooked. Despite the fact these are “law books� mostly written by surety attorneys, these
American Bar Association (ABA) publications – scroll down to “Fidelity and Surety Lawâ€? may be worth your while.

For construction contract surety claim matters, a concise (and free) resource is available, An Overview of the Contract Surety Bonds Claims Process thanks to the Associated General Contractors of America (AGC) and the Surety Information Office (SIO.)

If your surety claim involves highly technical construction issues, in addition to legal ones, you will have to search accordingly. For example, often construction contract surety claims may involve liquidated damages (LD) due to delays. Books like: Construction Scheduling: Preparation, Liability and Claims by Wickwire et al, Guide to Construction Contract Surety Claims Schwartzkopf et al., are excellent points of reference. Internet searches within bookseller sites of may yield similar titles.

Unfortunately, surety bond claims happen. Typically, they are not painless, nor are they insurmountable. The above resources can give some guidance and a rough template of how to proceed.

Guest Author: Surety Insider, LLC