Understanding the Surety Claims Process in Construction

Construction is inherently risky. General contractors and large subcontractors should understand the surety claims handling process, and understand the critical role they can play in claim resolution.

When a subcontractor or general contractor ceases operations, the surety has two main concerns; claim exposure related to completion of the project according to the specifications, and claim exposure related to payment of all subcontractors and suppliers.

The Surety’s Investigation Process

When claims do arise, sureties have a legal obligation to investigate them. Each state has different statutory and regulatory requirements regarding the investigation and handling of claims. State insurance departments also have fair claim settlement regulations that mandate fair investigations and prompt, fair and equitable settlements.
Within these varying (by state) guidelines, the surety’s investigation generally involves:

Information gathering. Collect information and documentation from the claimant and principal to help determine the scope of the claim according to the state’s applicable laws and regulations.

Information analysis. Evaluate and verify liability and damages to determine the validity of the claim.

Claim strategy. Establish the claim strategy - principal’s participation and cooperation is key in determining the strategy.

Claim evaluation and reserving. Evaluate, establish, and document the claim reserve which is necessary for any loss payment.

Claim resolution. Opportunity for the principal to resolve and determine whether to pursue a legal action or a negotiated settlement.

Contractor's Crucial Role in Claim Resolution

The contractor plays a critical role in the process and claim resolution. Early and frequent communication directly affects a surety’s ability to resolve a claim. The contractor's role includes:

Inform. Provide information and documentation to assist in the surety’s investigation.

Engage. Work with the surety claims personnel and consultants to resolve issues and mitigate exposure.

Resolve. Work with claimants to resolve claims.

Collateral. Provide surety with collateral upon demand.

Tender. Defend surety in litigation.

Indemnify. Reimburse surety for any loss incurred.

Proactive Measures Mitigate Risk

The risk of contractor failure remains high, and general contractors must continue to manage that risk. But challenging times require that contractors understand, and effectively manage, the claims process. Contractors should partner with a surety that recognizes their critical role in the process, and values and leverages the contractor's participation in the claims resolution process. As with any trusted relationship, communication and transparency are key to successfully navigating the process and minimizing the risk of loss.