CLAIMS PROCEDURES – COMMERCIAL SURETY BONDS
Written By: Jacob Dines, Surety1
AN OVERVIEW OF COMMERCIAL SURETY BONDS
Commercial surety bonds are encompassed by hundreds of different types of license, permit, probate, and court bonds. Commercial surety bonds are a three party obligation between the principal, the obligee, and the surety company.
- The principal is often the party seeking to do business through the use of a license or permit.
- The obligee is typically the state or government agency requiring the bond to be obtained prior to the issuance of the license or permit.
- The surety company is the financial guarantor for the principal. In the event there is a claim on a surety bond, then the surety company will investigate the loss, make a payment to the obligee in the event the claim is founded, and the principal will be required to reimburse the surety for the loss.
PROCESS OF A COMMERCIAL SURETY BOND CLAIM
A claim on a commercial surety bond can occur when a financial loss has been incurred by the obligee or a party affiliated with the obligee.
- The claimant will contact the obligee to obtain information on the surety bond i.e. surety company, contact information, bond number, and terms of the bond.
- The claimant will then contact the surety company’s claim department to file a claim on the bond.
- The surety company will investigate the claim by ensuring that the details of the claim are covered under the underlying obligations of the surety bond detailed in its language.
- If the claim is found to be legitimate and covered under the obligations of the surety bond, then the surety company will pay the requested amount to the claimant.
- The surety company will then require the principal and all parties indemnified to the bond to reimburse them for not only the amount of the paid claim. Many times the surety company will attempt to recover losses affiliated with the investigation. Examples of these other losses are attorney fees, court fees, forensic accounting fees, etc.
EXPECTATIONS OF CLAIMS BY THE SURETY COMPANY
Commercial surety bonds are underwritten with the expectation of zero losses to the surety market providing the financial guarantee. Although claims on a commercial surety bond are inevitable, it is understood that the premium charged by a surety market is a service charge to cover the costs and overhead of running the company, not to cover the losses involved in the event of a claim.
Keep in mind that even if there is ever a claim on a surety bond, the surety market will attempt to recover all losses incurred from the principal. Such monetary recovery of claims may include but are not limited to judgments, collections, and liens against assets.