What Can I Do if My Surety Bond Claim Is Denied?

A surety bond functions as a guarantee in a business transaction. The surety bond company works with the principal, or person guaranteeing to perform work, to establish a bond amount. When you hire a person or contractor who offers a surety bond to you as a guarantee of completing the project, you can feel more secure entering into the transaction. However, if the principal does not meet his obligations, you have to file a claim, which may be approved or denied.
How the Bonds Work
To obtain a surety bond, the principal must apply with a surety bond agent. The agent either approves or denies the principal’s bond. Once approved, the principal agrees to pay a set premium amount to the surety bond company. The principal will communicate with you that he has established a bond and give you a copy of the bond paperwork. The bonding company does not agree to pay for claims, but rather the bond functions as a type of credit. If the principal defaults on the bond and you file an approved claim, the company pays and obtains the money back from the principal.

Types and Benefits

There are many types of surety bonds, but the three most common types of bonds are the bid bond, the performance bond and the payment bond. When you hire a company with a surety bond, you have the assurance that the project will be completed on time, give yourself another layer of financial security and help assure you and your organization that you are hiring well-qualified contractors who are capable of getting a surety bond.
Claim Process
If the principal person named on the surety bond does not fulfill his obligation to you, you or your company can file a surety bond claim. The company who issued the surety bond will investigate the claim, and will pay the damages up to the value of the bond if the company agrees with the claim. The surety bond company then communicates with the principal on the surety bond to receive payment for the claim. The surety company can refuse payment on the bond, and you must then contact the company yourself or through your attorney to request payment.
Claim Denial
A strongly worded letter or threatened lawsuit from your attorney may be enough to cause the surety bond company to approve the claim, provided you have complied with all the requirements on the bond and are able to prove that you did not receive the services or payments promised. However, a Virginia court case in 2007 examined whether the bond obligation was null if the claimant did not file notice in a timely manner. The court ruled in favor of the surety company, because the claimant did not follow the notification process laid out in the bond.
When using a surety bond during a contractual process, make certain you have your attorney review the language of the bond. Make note of deadlines for claims, types of contractual breaches covered and how claims are processed and researched. If you cannot afford an attorney, and the amount of the surety bond falls under the small claims court limit in your state, you may file a breach of contract case with the small claims court in your local court.