If you want to know what happens when claims are made on surety bonds then you should start from the basics. A surety bond is a three-party agreement. This is ideally an assurance to the owner or obligee from the principal or the contractor. It says that the project will be delivered in accordance with the contract and on time. Sometimes in a large project the principal contractor may hire subcontractors. In such situations the contractor will require a surety bond from the subcontractor. The contractor now becomes the obligee and the subcontractor becomes the principal. Ideally, most surety companies are divisions or subsidiaries of insurance companies.
What Happens To A Claim
When a claim is made on surety bond the situation is investigated by the surety to find the truth behind the allegation of default by the contractor. The principal must provide all information necessary to the surety to perform under the bond. The surety will inspect thevalidity of the bond, whether there was any alteration of materials, whether the notice was precise, changes made in the scope of the contract or any gross overpayments made. The surety then determines the course of action that may include providing technical and financial assistanceto the contractor, rebidding for the remaining project, arranging for replacement contractor or paying the amount as penalty.
The surety has the right of subrogation wherein third-partyrights are enforced against the principal. To exercise subrogation rights the surety must first make the payment to the third party. In case the owner announces the contractor indefault and the surety then completes the project, then the surety has the right to undispersed contract funds. In this case the principal has to reimburse the surety for any incurred losses for its default for the project.