General indemnity agreements accompany most surety bond contracts. This guide explains exactly how surety indemnity agreements work and what you are liable for when you sign one.
What Is an Indemnity Agreement?
A simple definition of indemnity is coverage for potential losses or damages. It means one party is financially liable if they cause loss to another. In the surety bond context, an indemnity agreement holds the bondholder liable for compensating the surety.
Indemnitors agree to hold harmless and indemnify the surety from financial loss caused by failure to perform of the principal. This transfers risk from the surety to the principal and is typically a requirement before the surety will issue a bond.
How Do Surety Indemnity Agreements Work?
In surety indemnity agreements, underwriters determine if the principal has the financial capacity to meet the contract terms. An indemnity bond works similarly to a line of credit by guaranteeing money is available. Like a bank, the surety expects repayment from the principal if it covers a claim.
Business owners often establish an LLC to reduce personal liability for business finances. However, sureties require the personal indemnity of business owners to guarantee their obligation to repay the surety — even if the business goes bankrupt or is insolvent.
Types of General Indemnity Agreement Provisions
A principal may have different obligations in a general indemnity agreement (GIA) depending on the form’s specific terms. Here are the most common provisions found in surety bond indemnity agreements:
- Indemnification: A general indemnity provision transfers risk from the surety to the principal and covers a broad range of potential liabilities
- Right to settle: The surety may act on the principal’s behalf and has full discretion on how to respond to a claim: pay, settle or defend
- Right to enforce: The principal must fully cover any claims-related expenses of the surety, including legal fees
- Books and records: The surety may inspect the principal’s books and financial records to ensure financial capacity
- Duty to cooperate: The principal must participate in any claims investigations
- Collateral deposit: The surety has the right to request collateral security from indemnitors. (Only required for 0.1% of SuretyBonds.com customers.)
Who Signs the Indemnity Agreement?
Every stakeholder with 10% or more ownership of a business must sign the general indemnity agreement form individually and on behalf of the company.
This way, if the principal is unable to repay a claim, the surety can collect payment from the individual owners. This personal indemnity makes it critical to avoid bond claims by acting ethically and following all laws and regulations.
Why Does My Spouse Need to Sign?
The spouses of any married business owners will also need to sign the surety indemnity agreement. Spousal indemnity protects the surety if business owners try to transfer assets into their spouses’ names to avoid repaying the surety for a claim. In some cases, a notary public must sign and notarize the GIA as well.
Do All Bonds Require an Indemnity Agreement?
Not necessarily. For some low-risk bonds, the surety may instantly issue the bond without a credit check or indemnity agreement. However, every application that requires underwriting will also need a signed indemnity form before the surety will issue the bond.
Indemnity bonds have a higher risk of claim activity than other surety bonds due to the industry, certain terms and conditions, coverage amount — or a combination of factors.
What Are Indemnity Bonds?
Indemnity bonds are a type of surety bond that creates a three-party contract between a business or individual, a surety provider, and an entity requiring the bond (obligee).
They function like any surety bond, but also require an indemnity agreement between the surety and the bondholder. Learn more on our “What Is an Indemnity Bond?” page.
