Whether you're a contractor or a customer, it's a good idea to understand how a surety claim for a construction project works. Let's break the process down into its stages so you can see what will happen.
Determining a Cause of Action
Most sureties are paid to cover intentional failures rather than negligence by contractors. For example, the work might be substandard, the contractor may have gone over the budget, or the contractor may have never finished the job. There are also some scenarios where a surety may be paid to a subcontractor or supplier if the contractor fails to pay them in full.
Filing a Claim
An insurance company is typically the party that sets up a surety. Notably, a surety is different than an insurance policy. The big difference is that when a party — usually either the customer of the contractor or a government entity with an interest in the project — submits a claim, the insurance company will give the contractor a chance to make things right.
Suppose a business was paying for the construction of a new headquarters building. It would want some assurance that the building will be constructed within certain specifications. If there was a problem with the results, such as a floor that was unacceptably uneven, the customer would likely hire a construction surety lawyer and file a claim with the issuer of the bond.
The surety company will appoint an investigator to determine whether the claim is valid. If they don't believe the claim is valid after investigating, the company with notify both parties.
Conversely, if there is a valid claim, the surety company will notify both parties and give the contracting firm an opportunity to fix what is wrong. The contractor has the option to not fix things, but they will owe the surety company every dollar that's paid to the claimant. If the issue is resolved by some other means, usually by rectifying the problem, the surety firm ends the claims process and issues no compensation.
When a surety company rejects a claim, the claimant has one of two options. They can accept the outcome or sue. If there is a surety for the project, you should sue the surety company and not the contractor.
It's also wise to hire a construction surety attorney to guide you through the process. They can review the rejection letter and try to identify what the surety company got wrong. This will be the basis of your suit.
To learn more, contact a construction surety lawyer.