The Labour & Performance Bonds Claim Process Explained – Zehr Insurance Brokers Ltd.

What can the surety actually do about a claim?

Once the surety has investigated the claim and confirmed it’s valid, they have several tools available. Which one they use depends on the facts, the project stage, and the financial position of the parties.

Pay the claimant directly. The simplest resolution is the surety pays the claimant what’s owed, up to the bond’s penal sum. This extinguishes the claim but triggers their right to recover every dollar from you through your indemnity agreement.

Negotiate a settlement. Where the amount is disputed or the claimant has been overpaid relative to the work actually completed, the surety may settle at a reduced figure. You may be brought into these negotiations, and the settlement will count against the bond’s limit.

Assert your defences on your behalf. Where you have a legitimate legal position against the claimant such as deficient work, improper notice, amounts already paid, or claim outside scope, the surety can advance those defences to reduce or defeat the claim entirely. This is why early and detailed disclosure matters so much.

Arrange for completion of abandoned work. If a subcontractor has walked off the job because they weren’t paid, the surety may arrange and pay for a replacement subcontractor to finish that scope, keeping the project moving.

Exercise subrogation rights. Once the surety pays, they step into the shoes of the claimant and can pursue recovery from you  or from any other party in the chain responsible for the non-payment. This right exists on top of the contractual indemnity they already hold.

One important cap: the surety’s obligations are limited to the bond’s penal sum. A typical L&M bond is written at 50% of the contract price, though 100% bonds are required on many Ontario public projects. Claims that exceed the penal sum leave claimants to pursue lien remedies and direct claims against you personally.