If you've never faced the uncomfortable situation of a surety bond claim, you may be wondering what claims are all about. But as you move into the HVAC market contracting business, you will likely be asked to acquire one type of surety bond or another. And with surety bonds comes the risk of surety bond claims.

Whether the claim is legitimate, or unfounded, surety bond claims are best avoided. A surety claim can wreak havoc in your finances, get your contractor license revoked, and cause irreparable damage to your reputation. Therefore, understanding how surety bonds work, what they are, and how you can avoid surety bond claims is imperative to your success. Read on for the facts.

Surety bonds are a type of financial guarantee that is extended to one's clients, customers or to the state and public. Unlike insurance, surety bonds serve to protect the people one is working for, rather than oneself or one's business or property.

In other words, surety bonds protect customers from bad business practices, fraud, and other misdeeds which cause financial loss.

Most sheet metal works contractors will need a number of different types of surety bonds throughout their careers. Contractor license bonds are the bonds that contractors -- such as HVAC contractors -– usually need to obtain when they apply for a business license. These bonds guarantee that contractors will comply with state regulations, and industry standards, for their particular contractor license. They protect the public and the state from dishonest and unprofessional contractors.

Different states have different requirements about HVAC market contractor license bonds, and some do not require contractors to get licensed at all. If you're wondering whether your state requires you to get licensed, you can always check the National Contractors section on HVAC sales contractors, or the Contractor's License Reference Site, or contact the relevant authorities, such as your Contractors State License Board.

The amount of your license bond constitutes the maximum amount the surety will pay a claimant, if a successful claim against the bond is made. If that happens, you will be liable to the surety, and will need to reimburse them for the backing they have provided. This is why it is best to avoid surety bond claims in the first place.

In addition to your license bond, you may be asked to obtain a contract bond by certain clients. Contract bonds (or construction bonds) are required when contractors are hired to do work on a project. Performance bonds, payment bonds, and maintenance bonds are all examples of contract bonds.

All of these bonds guarantee that contractors will perform in accordance with the contract they have with the project owner, and the conditions set forth therein (performance bond). They also guarantee that contractors will pay their subcontractors, suppliers or laborers on time (payment bond), etc.

In some cases, if a contract bond is not in place, a claim can also be filed against a contractor license bond for the exact same reasons as against a contract bond. For example, the California Contractors State License Board website states the following about claims against contractor license bonds:

"Claims against a surety company may be filed by homeowners, any person damaged by a willful and deliberate violation of a construction contract, employees damaged by the contractor's failure to pay wages, or an express fund damaged as a result of the contractor's failure to pay fringe benefits for eligible employees."

In other words, if any of these conditions are breached and one of these bonds is in place, the contractor who has posted the bond is liable, and a claim can be made against the bond. In this case, too, it is best for HVAC contractors to avoid claims for the exact same reasons as mentioned above.

So, how can you avoid claims?

It is always best to avoid claims. Doing whatever is in your power to prevent a case for a claim should be your priority. The following are a number of things you can do to limit the likelihood of a claim:

Communicate often and openly with your clients. Be clear about the progress of the project, and everything the client should know in terms of difficulties or problems that stand in your way.

Communicate often and openly with any subcontractors, suppliers or laborers working for you. Plenty of claims are made against contractors by subcontractors because they do not receive their payments in time. Claims can easily be avoided by paying your subcontractors on time. If you’re concerned about cash flow, it’s a good idea to have a line of credit just in case. If for some reason payments can’t be made on time, be honest and share all relevant information with all parties concerned. Usually some form of alternative solution can be found, especially if something unpredictable occurs.

Keep detailed records of payments made and received. Make sure to always have everything else in writing, such as amendments to contracts, or cancellations thereof. Any agreements reached should also be put in writing and signed by all sides. Altogether, any documentation which follows the progress of your work can be useful in avoiding claims.

Stick to best practices. Remain transparent, open and honest. Sometimes claims can be resolved before they are made, simply by keeping everyone on the same page, so as to dispel any reasons for unfounded doubts.

If, however, you still end up having to deal with a surety claim, your best ally in working with this situation is your own surety. As soon as you are notified of a claim having been made, contact your surety. Cooperating, and providing the surety with all relevant information and documentation is key in resolving such situations, especially if there is no good cause for a claim.

Furthermore, settlements are often possible, so if you have the chance to reach a settlement with the claimant, you should consider this seriously. It’s important to remember that a settlement isn’t necessarily an admission of fault on your part, and often it can be the most cost-effective option for you and your business.

As a HVAC construction contractor, have you ever had to deal with a surety bond claim? If so, how did you settle the claim? Would you add any other advice to the above list?

Leave us a comment, we'd love to hear about your experience. Questions? Ask them below, and we can provide you with further information about the right course of action for avoiding claims.