Section 11.34 Obligations and Rights of Surety Upon Principal’s Default

• Library: Insurance Practice 2015

Upon receiving notice of default, the surety is obligated to complete the work or pay the damages not in excess of the penal sum of the bond.

Often, default results from a failure to complete the contract, either because the contractor voluntarily abandons the project or because the obligee requires the contractor to cease work because of a material breach of the principal contract. Bonds normally require that the obligee declare the principal in default before the surety is obligated to perform. But frequently the principal will notify the surety when there is difficulty, contractually or financially, before the obligee knows of a problem. Creditor notices on third-party bonds may prompt the surety to declare its principal in default under the conditions of the application and contract.

The surety has no obligation to complete the work, although it has a right to do so to mitigate its damages. The conditions under which the surety takes over the work upon the principal’s default are usually specified in the application for the bond. Derby v. United States Fid. & Guar. Co., 169 P. 500 (Or. 1917); Cent. Sur. & Ins. Corp. v. Martin Infante Co., 272 F.2d 231 (3...