A common question when a person is buying a surety bond is “how and why would someone put a claim against my bond?”
A claim on a surety bond is basically an alleged grievance stating that the bond holder (you) has either broken the law or not satisfied your required obligation pursuant to your business license. Sometimes a claim may be intentional but most of the time they are misinterpretations by either you or your customer.
Who can make a claim against a bond? The short answer is that anyone may make a claim against your bond. The claim however will be investigated by your surety carrier to see if it is actually a situation where there could be a payout. The claim typically can not be alleged for any more than the face value of the bond and the claim must occur within the active term of the bond. Each bond is different and has a defined discovery period for claims.
If a claim is made against your bond a few things will occur. Notification will typically come from the licensing entity directly to the surety carrier. The surety company will contact the Principal (you) to start the investigation process. The surety company fully expects that you will repay any claim paid out on your behalf. This was agreed upon when you signed the indemnity agreement.
If the claim is investigated and is proven to be false, nothing else will be required of you except a possibility of reimbursement of costs arising from the investigation.
Should the claim be found to be valid the surety company will first approach the Principal (you) to make the situation right. If the Principal (you) does not or cannot make the situation right the surety company will pay out the claim on your behalf. Of course, you are required to repay the surety company for any payments paid out. The Principal is always required to make the surety company whole again.
The best advice for the Principal (you) is to make sure to run the business ethically, follow all the rules and regulations set forth by the licensing department, and respond as quickly as possible to any alleged claims while getting them resolved before the surety company pays out.
Disclaimer: If you have an outstanding claim obligation to a surety bond carrier it is very unlikely you will be able to secure a new bond. Surety companies do not like to deal with Principals that do not fulfill their obligations so it could be very detrimental to your company to not resolve claims in a timely manner.