If you are obtaining a surety bond, you will likely be presented with an indemnity agreement. A personal indemnity is an industry standard for most surety bonds to be issued; this agreement can come into play when a claim is made against the bond. The purpose of this article is to explain why personal indemnity agreements are required to obtain a surety bond for business entities and address the common questions our surety professionals receive.
The Surety Bond Contract
Personal indemnities are required to obtain most surety bonds, and it is important to know where they fit in the bonding process. It all starts with the surety bond you are acquiring. Here’s a refresher on the three parties involved in the surety bond contract:
- Obligee: the entity that requires the bond, often a government agency in charge of regulating or licensing an industry
- Principal: the individual or business required by the obligee to obtain and provide a bond
- Surety: the insurance company that issues the surety bond
A principal applies for and obtains bonds from a surety insurer (surety) to protect one or more third parties, not the principal. By providing the principal with a bond, the surety is guaranteeing to the obligee that if the principal fails to adhere to the terms of the bond, the surety will pay the obligee damages caused by the principal’s failure to do so.
The major difference between surety bonds and insurance is that surety underwriters issue bonds with the assumption that the principal and additional indemnitors will reimburse the surety if the surety incurs a loss or expense in regard to claims made against the bond. The indemnity agreement is the contract that supports that obligation to reimburse the surety.
What Is an Indemnity Agreement?
An indemnity agreement is a legal contract that obligates one or more parties to hold harmless and indemnify and reimburse one or more other parties from financial loss. In the surety bond context, the principal and additional indemnitors agree to hold harmless and indemnify the surety from financial loss caused by the failure of the principal to perform the obligation guaranteed by the surety bond.
The requirement that an individual person enter into an indemnity agreement is an industry standard to obtain most types of surety bonds. A surety agreeing to issue a bond on behalf of a principal is an extension of credit (the surety’s). It is like a bank extending a line of credit or other loan to a business. Like a bank, the surety expects to be repaid by the principal if the surety is required to pay a claim on a bond issued to a principal. Business owners often will establish an LLC or a corporation to separate their business finances from their personal finances. But like banks that often require business owners to personally guarantee the bank’s loan to their business, sureties often require the business owners to personally guarantee the obligation of their business to repay the surety if it pays a claim on behalf of the principal.
SuretyBonds.com Customers’ Frequently Asked Questions
Now that we have covered the difference between a bond and other types of insurance, the bond itself and the indemnity agreement, let’s dive into the questions some customers have after reading the indemnity agreement: collateral and assignment of personal or real property.
Collateral Security: What is it?
Despite the mention of collateral in the indemnity agreement, it is reassuring for many to hear that this is a general legal document that contemplates all situations; this section does not apply to most SuretyBonds.com customers.
When applying for a bond, approximately 0.1% of SuretyBonds.com customers encounter collateral as a requirement. Collateral (first mentioned in point 5 of the SuretyBonds.com indemnity agreement) is a pledge of property that you provide to the surety as protection in the unlikely event of a valid claim on the bond. Most of the time, the property is cash or its equivalent. In some instances, it could be other forms of your personal property. And in rare cases, it may be in the form of an interest in your real property (like a mortgage). When collateral is required, our surety professionals walk applicants through the process to make it as easy as possible. A member of our team will go through the process of submitting the collateral, such as a cashier’s check or an irrevocable letter of credit, prior to this agreement.
Collateral security is also an optional remedy available to a surety in the case of a claim, utilized by sureties across the country. This option is not specific to SuretyBonds.com. The surety has the right to request collateral security from the principal and any additional indemnitors to secure the obligation to repay the surety pursuant to the indemnity agreement.
Personal or Real Property Assignment: What does this really mean for me?
Similar to the clause regarding collateral, some customers have questions regarding the assignment of personal or real property in the event of a claim (mentioned in point 8 of the SuretyBonds.com indemnity agreement). However, this is not likely. The point of this inclusion in the indemnity agreement is to provide a level of protection to the surety in extreme, or high-risk, bonding situations.
An important thing to remember is that high-risk bonds are issued with the intent to trust the principal. This trust implies that the principal will not commit fraud or conduct illegal activity during the term of the bond. If a large high-risk bond is issued to you or your business, the best way to protect yourself from changing the assignment of personal or real property due to a valid claim is to make sure you are fulfilling the obligations covered under your bond. Ensure that you, the principal, understand the requirements, rules, and regulations and the terms of the bond — and don’t hesitate to reach out to the obligee requiring the bond with any questions.
Licensed businesses should always strive to adhere to upstanding industry practices, including being honest and fair with their clients. Staying informed of industry regulations and following up on new legislation are two important ways to avoid outcomes like changed real estate assignment.
Indemnity agreements are the industry standard. While the best place to understand the process of getting bonded is the obligee requiring the bond, SuretyBonds.com’s surety professionals are happy to help you through the process. To speak with a member of our team, start a live chat or call 1 (800) 308-4358.