What happens if a surety has to pay a claim?

A Principal is legally obligated to reimburse the Surety Company for any loss and expense incurred by the Surety. The Principal’s obligation to the Surety can, therefore, be greater than the original obligation to the obligee. The Surety has the same recourse against the Principal as any other creditor would have in recovering their loss. This is the primary difference between a surety bond and insurance.

The Surety’s claim department will conduct an investigation as quickly as possible to avoid any further damages and mitigate their exposure. It is important to note as the Principal under a bond, that a pending claim does not necessarily mean there will be a financial loss incurred since the dispute may not even be legitimate. If the Surety does determine through their examination that the claim is valid, the Principal will be reminded of their obligations under the indemnity agreement and given the opportunity to satisfy the claim first. If the Principal fails to respond, the Surety will arrange settlement with the Obligee, and implement collection proceedings against the Principal.