Bonding Company Steps to Recover After a Claim

1. Surety claims are never abstract to a bonding company. They arrive as phone calls at 6 a.m., notices from obligees who Swiftbonds features and advantages sound more tired than angry, and project sites where the gate is locked but the schedule keeps moving. Claims are expensive, distracting, and reputationally risky. They also happen, even with a disciplined underwriting shop. The measure of a good bonding company is not whether it can avoid every loss, but how effectively it recovers once a claim hits. Recovery is not a single step; it is a sequence of decisions that start before the claim and continue long after the obligee is paid. What follows is the cadence I have seen work across contract and commercial surety: practical steps, trade-offs, and the rhythm of a recovery effort that protects capital and relationships without burning the book. What “recovery” means in surety terms When a claim is made on a bond, obligations diverge. The bonding company owes duties to the obligee under the bond, and it holds rights against the principal and indemnitors under the indemnity agreement. Recovery is the process of converting those rights into cash, or at least offsetting loss: reimbursement for amounts paid, recovery of consultants’ costs and legal fees, and mitigation of future exposure. It is also the process of stabilizing the principal’s business, where feasible, to avoid additional claims. Recovery is not only about sending demand letters. The strongest recoveries emerge from a disciplined file, early leverage points, collateral where it counts, and a plan that weighs legal theory against the real liquidity in front of you. The pivot from claim to control The first hours of a claim are crowded with requests. Obligees want performance and clarity. Principals want time. Subs want to know who will pay. A bonding company regains control by doing three things immediately: gathering reliable facts, setting the communication lane, and securing the indemnity position. Fast fact-gathering is not a forensic autopsy. It is enough to separate noise from signal. I have seen performance bond claims where a late submittal or a permit delay had been mischaracterized as abandonment. A site walk with an independent consultant within 48 hours reframed the conversation and avoided a takeover. On payment bonds, a quick ledger review and a dozen calls to largest suppliers often tell you whether you are looking at a series of small disputes or a systemic cash failure. Clarity in communication also matters. Designate a single internal point person and require that material statements, schedules, or demands come through them. Fragmented channels lead to inconsistent positions, which later bleed into litigation. Securing the indemnity position is the quiet work that pays dividends. Get updated financials, including job cost reports, aging schedules, and bank statements. Confirm the indemnitors’ current addresses and employment. Record UCC filings if your indemnity agreement provides for it and you have a perfected security interest in accounts, equipment, or contract balances. If collateral is warranted under the indemnity, ask for it now, not after you fund a default.

2. Sorting bond obligations and loss scenarios Not every claim carries the same exposure. A bonding company needs to place the claim on a map quickly. Performance bonds drive the most operational decisions. Options usually fall into four buckets: finance the principal to complete, tender a replacement, take over and complete, or deny. Financing a principal maintains continuity and often costs less, but it requires tight monitors and credible management. Tendering a replacement reduces administrative burden but depends on an obligee willing to accept the tender. Takeover places all risk on the bonding company and should be reserved for situations where control is the only path to limit the loss. Denial must rest on solid contract and bond defenses, not wishful thinking. Payment bonds behave differently. They are often a rolling series of claims that reflect a stressed cash flow rather than a single break. Here, setting claim protocols, prioritizing large and lien-sensitive claimants, and pushing for joint check agreements can prevent the pile from growing. Commercial bonds, such as license and permit or court bonds, carry their own patterns. For these, the indemnity driver is usually the individual rather than a corporate enterprise, and recovery speed becomes more important than surgical accuracy. The discipline of timely, documented decisions Every significant choice should carry a timestamp, a rationale, and a document trail. Claims files that read like a coherent story, with contemporaneous emails, consultant reports, and meeting notes, are easier to defend and easier to monetize. Two habits help. First, write decision memos for inflection points: financing agreements, tenders, denials, collateral demands. A half-page summary of facts, options, cost comparisons, and why you chose the path you did keeps the team aligned and arms outside counsel later. Second, maintain a living exposure model. It should capture reserves, spend-to- date, expected completion costs, potential offsets, and recoveries. Update it with every material change. The ability to show how your view of exposure evolved lends credibility in court and discipline in negotiations. Collateral, indemnity, and leverage without theatrics A general agreement of indemnity is the backbone of surety recovery. Yet indemnity rights lose value with each week of delay. People move assets, priorities change, and bank covenants tighten. Collateral demands are often uncomfortable, especially when the principal is fighting for its business. Make the demand early and specific. If fluid liquidity is scarce, consider structure: cash collateral held in a separate account, assignment of receivables, additional insured status on property or builder’s risk policies, or a deed of trust on a secondary property. In one case, a principal could not post cash but held a fully owned yard with heavy equipment. A perfected interest in the equipment and a consent to sell under a monitored plan covered 70 percent of expected exposure over six months. Personal indemnity is powerful, but it is not a magic wand. Before spending heavily to pursue individuals, assess collectability. Run asset searches, look for homestead protections in the relevant state, evaluate joint ownership, and consider competing creditors. A bonding company wins nothing by obtaining a judgment that cannot be enforced. On the other hand, carefully chosen ex parte remedies, like prejudgment attachment or replevin where permitted, can change the posture of a case. Use them selectively and with clean hands. Working with obligees to cap the loss Obligees want projects finished and suppliers paid with a minimum of friction. A bonding company wants to limit cost and avoid admissions that complicate recovery. Those positions are not mutually exclusive if handled with candor and boundaries. On a performance bond claim, ask for a short, written cure plan from the obligee’s perspective. Not a laundry list, but the three or four items that stand between the project and completion: the long-lead chiller, the tested fire alarm, the paving window before weather sets in. Tie any financing or takeover decisions to those deliverables. Scope creep is what inflates losses. If the obligee insists on more than the bonded scope, document the distinction and reserve your rights. On payment bonds, push for claimants to use standardized forms. Require basic substantiation: invoices, delivery tickets, proof of last furnishing. Consider escrow or trust arrangements that pay subs and suppliers in a sequence aligned with

3. lien deadlines. In a school project where thirty payment bond claims arrived within two weeks, we set a weekly virtual conference with the obligee and the construction manager. The meeting was dull by design: three agenda items, a summary of payments made, disputes flagged, and next week’s releases. Dull meetings save money. When to finance, when to tender, when to walk The hardest judgment call is often whether to keep the principal on life support or cut ties. This is where practical experience counts. A principal with strong field leadership, a realistic schedule, and a clear estimate of remaining cost may be financeable even if the balance sheet looks ugly. A principal with a culture of blame, poor documentation, and no grasp of unit costs is almost never a good candidate, even if they promise to bring in friends and family money. Tendering a replacement can be elegant when the market cooperates. The tender must be clean, the replacement contractor credible and licensed, and the price defensible. Obtain competing quotes. The obligee’s acceptance should include a release for performance obligations up to the tender date, subject to latent defects you cannot responsibly release. In a municipal wastewater job, a tender saved six figures simply by avoiding the demobilization and remobilization costs of a takeover. Walking away by denying a claim is sometimes correct and always risky. Denials should rest on clear triggers: out-of- scope demands, premature termination in violation of contract, failure to meet conditions precedent like notice and opportunity to cure, or pay-if-paid provisions in applicable jurisdictions for payment bonds. Before denying, build the record with letters that note each defect and offer reasonable paths to cure. Courts and arbitrators favor the party that looks reasonable. The role of consultants and counsel, kept in proportion Consultants and attorneys are tools, not a reflex. They should be brought in when they add clarity or leverage. On complex projects, a scheduling consultant who understands critical path and earned value can shrink exposure by pinpointing owner-caused delays. On a payment bond case with fifty claimants, a single case management order negotiated by counsel can prevent chaos. Fee spend should track exposure. Spending 200,000 dollars to chase a 300,000 dollar recovery usually means you are chasing the wrong recovery. Write fee budgets with gates. For example, authorize initial counsel spend to evaluate prejudgment remedies, then reassess after you see asset realities. Require monthly scope updates from consultants tied to specific deliverables: a status report, a change order exposure matrix, a punch list ranking by cost to complete. Document harvest: turning the job file into recovery fuel The best recovery files are built, not found. Make document harvesting a parallel track from day one. Secure a copy of the prime contract, all change orders, latest pay application, subcontract agreements, major purchase orders, surety bond forms, indemnity agreements, bank security agreements, and trust fund statutes relevant to the jurisdiction. Ask for the job cost ledger, vendor aging by project, and cash disbursement journals. From those documents, extract the items that become levers. Does the prime contract contain a right of setoff against remaining contract balances for costs of completion? Does the jurisdiction recognize construction trust funds that elevate certain claims? Are there unapproved change orders that, if documented correctly, could increase the contract balance and therefore reduce net exposure? On a hospital build, we recovered 400,000 dollars post-completion simply by pushing through owner-approved, architect-certified change orders the principal had never billed. Turning the indemnity agreement into an action plan Indemnity agreements tend to be broad. You still need a stepwise plan to make them effective. Send a clear demand for indemnity and exoneration, including an itemized statement of loss and estimated future costs. Attach proof of payments and reserve calculations. Tie the demand to a short deadline. This is the first and only list in this article. If the agreement requires the principal to post collateral equal to reserve, make the demand with math and a rationale. If you need access to books, cite the cooperation and access clauses. If you plan to pursue confession of judgment or similar remedies authorized in the agreement and jurisdiction, prepare the paperwork while you continue negotiation. The best negotiation posture is one where legal and practical steps are moving in parallel.

4. Cash management during completion Once a bonding company is funding completion, cash discipline becomes survival. Create a job-cost account dedicated to the project. Require backup for every disbursement, ideally through a cost-code framework that mirrors the schedule of values. Pay subs and suppliers directly where possible, not through the principal. Use joint checks when you need the principal’s involvement for logistics or warranty. Do not try to solve past-due debts on the back of the bonded job. Keep payments strictly tied to finishing the bonded scope. If the obligee presses you to clean up legacy disputes unrelated to completion, push back with documentation and the language of the bond. On one highway project, a push to “true up” winter conditions claims from the prior year would have burned 15 percent of the remaining contract balance. We declined and still finished on time. Negotiating with banks, lenders, and other creditors Bank relationships can make or break recovery. Many indemnitors have lines of credit secured by all-assets liens. If you need access to accounts or receivables, you will likely need to negotiate an intercreditor agreement or at least obtain a non-disturbance letter for the bonded contract proceeds. Come to those meetings with specifics: identify the contract balances and retainage you seek, the expected timeline of draws, and the safeguards you will implement to ensure funds go to bonded obligations. Banks respond to clarity and oversight. In several workouts, we obtained limited carve-outs for bonded jobs in exchange for weekly reporting and a mutual standstill on aggressive collection activity. Litigation as a means, not an identity Lawsuits are tools to create leverage or obtain recovery where voluntary payment is not forthcoming. Pick the forum that accelerates decision-making, not the one that flatters your brief. Arbitration may be faster for contract disputes with the obligee, while court can be advantageous for injunctive relief or to pursue multiple indemnitors in a single action. Decide early whether you will pursue a global action or a sequence. A global action can save cost but risks delay if one defendant bogs down the case. Sequencing can produce early wins that spur settlement, but it requires discipline to avoid inconsistent positions. If you file, keep the pleadings crisp and the exhibits complete. Vague claims and missing attachments hand the defense oxygen. Measuring progress and adjusting the plan Recovery is a moving target. Treat it like project management. Establish three to five key metrics tied to action, not just dollars: days to secure collateral or standstill, percentage of payment bond claims resolved, cost to complete variance against estimate, and legal budget burn versus plan. Review them every two weeks in the early phase, monthly once the file stabilizes. Be willing to pivot. If financing the principal stalls and your burn rate climbs, execute the tender you prepared as a Plan B. If an indemnitor proves judgment-proof, shift focus to third-party recoveries: wrongful termination damages against the obligee, reinsurance where applicable, or claims against design professionals if defective plans drove the loss. Preserving reputation while protecting capital A bonding company is not a collection agency. You sell trust. Recovery should reflect that. Be firm and transparent. When you deny something, explain why with references to the bond and contract, not bluster. When you make a mistake, correct it. The obligee you treated fairly during a tough claim often becomes a reference that wins the next bond line. Internally, debrief every significant claim. Capture the underwriting signals that preceded it: concentration risk with a single owner, thin gross margins, a new geography, a principal who refused monthly job cost reporting. Feed that back into your underwriting standards. Recovery is not only about dollars back; it is about fewer dollars going out next time on the wrong risks. Edge cases that test judgment

5. Some files do not fit the mold. A contractor dies mid-project and the spouse is an indemnitor. A bankruptcy petition lands hours after a collateral demand. An obligee is a foreign state entity with unfamiliar procurement laws. In these moments, resist the urge to force a standard playbook. In probate-linked indemnity, consider appointing a special administrator to manage business assets or seeking court leave to sell equipment for preservation of estate value. Coordinate early with bankruptcy counsel in automatic stay scenarios. You may still assert rights to contract balances held in trust or seek relief from stay for setoff, but timing and tone matter. For foreign public obligees, engage local counsel on sovereign immunities and dispute resolution mechanisms. A small spend on specialized advice can prevent large, irreversible missteps. The human factor: principals and indemnitors under stress Principals and indemnitors are often in the worst stretch of their professional lives during a claim. Anger, embarrassment, and denial are common. None of that changes your duties, but empathy can produce better outcomes. Lay out options plainly. Offer structured paths: a short-term forbearance in exchange for collateral, an orderly sale of assets rather than a sheriff’s auction, a partial release upon milestone payments. The goal is not to be nice, it is to be effective. People who believe the process is fair are more likely to cooperate and less likely to obstruct. When to close the file, even if money is left on the table Perfect recoveries exist mostly in training manuals. At some point, the incremental dollar costs more to chase than it will return, or it threatens relationships that matter more in the long run. Closeout decisions should be analytical: compare the net present value of likely recovery against ongoing legal and administrative spend, and include the probability of collection. If the expected recovery is marginal, negotiate a walk-away with broad releases and confidentiality. Document the rationale. Move the team to the next file where the slope is better. Practical checklist for the first 30 days Confirm bond exposure, secure documents, and set a single communication channel. Obtain updated financials and job cost data, and issue a focused indemnity and collateral demand. That single list pairs with the earlier one, keeping within the constraint of at most two lists. Everything else should live in the running narrative of the file. A final word on culture and cadence Recovery excellence is more about habits than heroics. The bonding company that responds quickly, documents decisions, pushes for collateral early, partners with obligees to cap scope, and measures progress with humility and clarity will outperform the one that relies on last-minute legal theatrics. Over time, that culture shows in the loss ratio and in the quality of the book. Claims come to every surety. Recovery separates the disciplined from the hopeful.