What Happens To A Surety Bond On Default?

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What happens when a surety company has to pay out on a large bond due to a construction defect or other claims by the obligee? Here’s an example: a significant project in Austin faced a subcontractor default, prompting the general contractor and property developer to seek remedy under their surety bond.

Legal disputes and counterclaims
The situation led to lawsuits between the subcontractor, prime contractor, and surety company. Disputes arise when the surety seeks remedy against the principal, the bond purchaser. Although the principal might not have an immediate obligation to pay under the defect, they become liable once the surety compensates the obligee.

Responsibility of the Principal
Purchasing a surety bond doesn’t absolve the principal of responsibility. Even if the bond covers the client, the principal remains accountable to reimburse the surety company. These cases can involve significant sums, leaving the principal financially liable.

Protecting contractors and general contractors
To safeguard yourself as a contractor or general contractor, it’s crucial to ensure compliance with construction and licensing procedures. Quality control throughout the process is vital. If a subcontractor defaults and the surety pays out, the responsibility ultimately falls back on you.

Importance of Comprehensive Coverage
Understanding the layers of surety and general liability insurance is essential. Having multiple layers of coverage fills potential gaps in exposure. Relying solely on one form of coverage might leave you vulnerable to claims and subrogation.

Mitigating Financial Risks
Consider potential liabilities, especially if a third party is injured. Having comprehensive coverage protects against unexpectedly large payments that could impact your profits and losses. Understanding the scope and limitations of your surety coverage is key to mitigating financial risks.

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