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Surety Claim for performance bond


Surety bonds offer critical protection to the construction project owners against contractor default and are essential to any prudent construction risk management strategy. 

There will be a process to ascertain the validity of a claim when submitted. The Surety will have to investigate and determine if both the Obligee and Principal met obligations under the contract. 

Surety bonds and how they work. 

A surety bond involves three key parties, namely the principal, the obligee and the surety. The principal is the individual or organization seeking financial aid (debt) from the obligee (lender). The obligee, being sceptical as to whether the principal shall repay the debt, asks them to be presented with the surety (guarantee) to stand in for the principal (borrower) if they cannot repay the debt. This design of agreement to all the three parties is the surety bonding them.  Surety bonds work to ensure that the lender does not suffer the risk of losing the finances they lend out. The borrower has also established a cushioned landing in case a repayment claim finds them unable to pay. A surety bond will generally be affected if the borrower (principal) fails or refuses to pay their debt. However, if the borrower settles the debt to the last penny, the surety bond is not affected.  

Who is the surety?

The surety is an individual or a group of structured people that accepts to be liable to repay the debt of another person who is not in a position to clear the debt off or has refused to settle it. The surety, therefore, acts as a bail person to the individual caught up in the situation that they are not able to repay a debt they took. 

For example, in Canada, a friend or the school one works for would be their surety when they approach money lending organizations. The principal and the surety have to get into a contract of their own called underwriting. This is where the surety holder assesses if the risk of protecting this borrower is worth it and if the borrower will pay them back their money if they help settle their debt to the lenders. 

Examples of surety bonds. 

There are different examples of surety bonds which includes; performance bond granted from an insurance company that guarantees a contractor offering their services to the buyers. The buyer will be compensated if the contractor fails to deliver successfully what was expected of them. 

Another example of a surety bond is payment bonds. This bond guarantees that the contractor shall receive their dues after completing their project. 

Lastly, there are court bonds. These are bonds that the court requires an individual to obtain before the court proceeds any further. If this individual goes against the court’s rules and regulations, they are to compensate the court. 
Businesses that would want surety bonds. 

Surety bonds work to protect individuals and organizations against breached agreements that may subject them to a loss. Businesses must acquire these surety bonds. An example of businesses that may benefit from this may include private construction companies. These surety bonds will ensure that this construction gets paid for the construction work they completed. 

The food supply business would benefit from surety bonds. After supplying, these suppliers would claim their financial settlements, say to a school that refuses to pay them and thus avoid incurring losses. 

Cleaning and hygiene businesses would also benefit from surety bonds. This business would secure the contract by producing their surety bond to guarantee their clients consumer protection because they will deliver the cleaning work without fail.  
Conditions for surety bond claims. 

Three basic conditions must be met before a surety bond claim takes place. These conditions are:

1. First, the obligee, the lender, should make it official that the borrower, the principal, cannot settle the debt according to how they agreed. This official communication should be made in writing. 

2. Secondly, an investigation should be done to satisfy that the borrower breached the agreed arrangement they had with the lender. 

3. Thirdly, an investigation should be done in order to ensure that the lender or the obligee fulfilled all their agreements with the borrower. 

When all the above conditions have been assessed and successfully concluded, a green flag is given to the obligee to claim the surety bond to settle the debt. 

Important document to place a surety bond claim. 

When placing a surety bond claim, what documents need to appear for a successful process?

These documents include:

 A full copy of the contract between the principal and obligee for the particular engagement that was being undertaken
 Another document that shows all amends that might have been made to the original contract
 Present all ongoing communication about the contract. 
 A report for payments done and when they took place 
 The latest financial statement between the borrower and lender. 
 Proof showing the abortion of the contract or its breach was in line with the agreement made between the obligee and principal. 
 A document of all claims that had been made and received. 
 Any document relevant to the claiming process. 
 Clearly stipulate reasons that made the contractor guilty to have breached the agreement. 

Instances where surety fails to be granted. 

It is not always a guarantee that the surety claim will be granted. Some of the reasons why surety will fail includes:
 When the borrower has not refused to settle the debt, there is no need to claim surety. 
 When the surety company is not fully persuaded that the borrower has defaulted payments. They will therefore be adamant about offering the surety bond. 
 When the lender company has not satisfied the contract agreement will also stand no chance to receive a surety bond. 

Finally, when the lender illegally withholds key information regarding the contract, their claims
for surety bond shall automatically fail. 

Labor and material payment bond. 

Labor and material payment bond is a type of insurance that ensures all workers are paid for their work and the material they supply. 
For example, my team trained teachers during a Sunday school teacher training. We carried booklets with the course material that we had to print and create on our own time. However, before the work engagement, we agreed with the clients that stipulates the fee for the training labor and the materials used, which included the vehicle fuel to the venue. Because the clients had to stipulate the fee for the training labor and materials used, this is a labor and material payment bond. 


Although surety bonds cannot completely replace your business insurance, it is similar to insurance because they both provide you protection. It is best to have both surety bonds and insurance for your business to ensure you are safe.




Don't let it get out of control. Surety Claim investigation is no fun and could harm your future business. Understand the conditions, call and discuss with us on all your options.


Surety AssociationThe Surety Association of Canada (SAC) is the national trade advocacy association that represents the interests of the surety industry across Canada. Its members consist of primary surety firms, surety reinsurers, surety/insurance brokers, and other organizations that provide related and complementary services to the surety industry

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