When you obtain a surety bond, it constitutes a contract between three parties. The principal is either you or your business entity, the party that requires you to get bonded is the obligee, and the surety is the underwriter of the bond. By signing this contractual agreement, the surety grants its financial backing in your name, so that you can meet the requirements of the obligee.
Often, when getting bonded, you will be also required to complete a surety bond indemnity agreement. The difference between the general indemnity agreement (GIA) and the bond itself is subtle, but important to grasp.
The surety bond GIA is an additional contract between the principal and the surety that transfers risk from the latter to the former. It guarantees that the surety is financially protected and will receive all due payments from you, the bonded entity. As the principal, you take the role of an indemnitor who assumes full liability, while the surety is the indemnitee, which is freed from financial obligations.
Why is the GIA needed? While the bond outlines your responsibilities in front of the obligee, it does not clearly state your relationship to the surety. With the indemnity, however, the surety obtains legal protection in case it has to pay out a proven claim on your bond. This additional document confirms that you are solely in charge of reimbursing the full costs that the surety incurs due to your violations of the bond.
As the indemnity contains enforceable legal rights, it is a preferred way for sureties to have extra security that they won’t suffer any losses by providing you with a bond. Instead of relying on general laws, the GIA provides actionable tools for sureties, to ensure your financial responsibility towards them.
While obtaining a surety bond, most bond companies will require you to sign an indemnity agreement. However, there are certain cases where a signed indemnity agreement will not be required, such as for bonds that do not require credit checks. As a rule of thumb, if you’re purchasing a higher risk bond, you should expect a GIA requirement.
A number of people will need to sign the indemnity agreement beyond the main bond applicants. These include all business owners and stakeholders possessing more than 10% of the company, as well as the spouse of the principal.
Owners need to sign the GIA both as individuals and in the name of their company. The reasoning is that in case the business does not have sufficient funds to cover claim costs to the surety, personal finances may be used for this purpose.
As for spouses, it’s a common practice that they also need to sign the indemnity for further security. Why? In case of a proven claim, an owner may want to transfer their money to their spouse to avoid paying their obligations towards the surety. The spousal indemnity thus gives protection in such circumstances.
Before you sign your surety bond indemnity agreement, it’s important to get thoroughly acquainted with your duties under it. Every surety has a different version of this agreement, but there are still some common provisions you should know about.
The basic statement in the indemnity is the so-called indemnity provision. It describes the transferral of financial risk from the surety to you as the principal of the bond. Usually this provision is broad, so that it can cover different types of potential liabilities.
Another typical component of the indemnity agreement is the right to enforce the indemnity. It states, in essence, that the indemnitor guarantees full coverage of financial loss to the surety, including attorney’s fees and any other expenses in relation to enforcing the GIA.
Next in the list is the right to settle provision. It transfers to the surety the right to make the final decision on whether to pay, settle, or defend a claim. By signing this, the principal agrees that the surety has full discretion and is bound by it.
Other common provisions include the right of the surety to examine your company’s books and records, as well as your duty to cooperate in the investigation of claims.
The main purpose of the indemnity is to secure fair compensation to the surety in case of a claim against your bond. If the principal undergoes a claim procedure and does end up having to reimburse claimants, the bond underwriter is the one who will cover the costs at first. That’s why in some cases, the surety will also require a collateral that backs up your duties under the agreement.
Generally, if the bonded party defaults on its repayment towards the surety, or does not comply with other provisions in the GIA, the indemnity is the protection that the bond provider can use. It may take legal action by bringing the case to court. In that case the indemnity will be used as the basis for suing the principal. That’s how the surety will be able to recover the funds it has used for the bond claim. Enforcement of the indemnity also includes the fees and expenses connected with the court case.