When surety bonds are issued, they are assumed to carry zero risk for the surety company who writes them. The surety bond itself outlines the terms of the agreement between the principal, the surety company and the obligee, including the amount that the surety will pay out on behalf of the principal if a claim is filed.
However, the bond form typically does not include language about the principal’s reimbursement to the surety.
So, how does the surety company confidently issue a surety bond while assuming that they will suffer zero loss? This is the importance of an indemnity agreement.
What Is an Indemnity Agreement?
An indemnity agreement is a two-party contract used by surety companies to transfer risk from one party to another.
In a surety bond indemnity agreement, the party that is assuming the risk is the indemnitor or principal, while the other party being absolved of liability is the indemnitee or the surety company.
For the purpose of surety bonds, the agreement will contain a clause indicating that the principal indemnifies the surety against loss.
Who Needs to Sign the Indemnity Agreement?
Anyone with an ownership stake in the company for which the bond is being issued will be required to personally indemnify themselves, as well as their company. Although they may not have any ownership of the company, the spouse of every owner will also be required to sign the indemnity agreement.
This is so that, in the event of a claim, the owners of the company are unable to transfer their assets into their spouse's name in order to avoid reimbursing the surety for money paid out on their behalf.
What Happens If the Terms of the Indemnity Agreement Are Not Met?
The surety may take legal action in order to recover any funds if the principal defaults on their repayment to the surety or fails to comply with any provision outlined in the terms of the indemnity agreement.
