If you’re a contractor of any kind, then you are likely required to carry surety bonds, either in order to comply with local regulations or to meet demands set by your clients. The bond effectively acts as a guarantee of compensation to the client if you fail to deliver on your promises.
While a bond is a lot different from standard commercial liability insurance, there is a process required to file for compensation under the bond. Though surety bond claims usually involve the client and the company that issues the bond, the principal (the contractor) will also have a role to play.
Understanding Surety Bonds
A surety bond is not insurance in the traditional sense. It is a guarantee from a financial institution that you have the money to compensate clients if you make mistakes.
In contracting, bonds go a long way toward establishing trust between businesses and clients. By signing a contract, the business agrees to complete a certain service for the client. The client needs this service for a reason and if the contractor fails to render the service, then it is the client who stands to lose out. A surety bond will act to guarantee that if the contractor fails, the client will receive adequate compensation for their losses.
While it looks a lot like liability insurance, a surety bond provides no financial assistance to the contractor in question. While it will guarantee payment to the affected client, it will not free the contractor from having to pay this cost. Rather, the contractor will have to make remittance payments to either the client or the surety company (if the surety company provides the settlement to the client).
What Happens When Claims Occur
Clients usually only file surety bond claims if they feel that you have not delivered on the terms of your contract. A claim might be triggered if you didn’t complete the project within the specified timeframe, if you didn’t meet budget projections or failed to provide the quality of services you promised. Worse still, if a client alleges that you abandoned the project, then they might use your bond as a resource to recoup their losses.
Usually, you must provide information on your bonding company in your contract. That way, the client will know who to contact in order to file the claim. At this time, the bond company and the client will reach a settlement, and you will be kept informed of what that settlement is. At this time, you will be notified of how to make appropriate payments back to the surety company for the money dispensed on your behalf.
If you face a surety bond claim, our agents are here to help. We know that the process can feel overwhelming, but we will make certain you can meet your obligations to your clients without facing exceptional hardships on your own.