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What is a Surety Bond Indemnity Agreement?
The surety bond indemnity agreement is the agreement that a surety makes with the bond principal upon providing them with their bond, which establishes the conditions under which the bond is provided.
When a claim is filed against the principal’s bond, the surety investigates the issue and decides whether it should pay, settle or defend the claim. If the surety finds that the claim is legitimate, it will extend compensation to the obligees up to the full penal sum of the bond.
This is when the indemnity agreement comes into force. Under the indemnity agreement, once a surety covers a claim, the bond principal is obliged to indemnify (repay) the surety in full for the compensation it has extended.
This is why surety bonds are often described as a line of credit extended to the bond principal which must be repaid once it has been extended by the surety to the principal.
Why is the Indemnity Agreement Necessary?
The indemnity agreement is required by the surety to protect itself against the possible risks associated with providing a surety bond to a principal.
The surety bond is the agreement between the bond principal (the company or individual obtaining the bond), the bond obligee(s) (the state or the public) requesting that the principal be bonded, and the surety bond company.
The surety bond company vouches for the principal and guarantees that they will fulfill their obligations towards the bond obligee(s) as defined within the bond and in state statutes. Should the principal fail to do so, obligees can file a surety bond claim and request compensation for any damages or losses they suffer do to the actions or inactions of the bond principal.
When extending a bond the surety is basically guaranteeing to the obligee that there will be money available to cover for any claims that may arise. This creates a risk for the surety, because of the possibility of a claim arising, against which it protects itself by entering into an surety bond indemnity agreement with the principal.
For this reason sureties will require principals to sign an indemnity agreement for most bonds.
If you have questions regarding surety bonds and how they work, our detailed ‘What is a surety bond’ page can provide you with answers.
Who Needs to Sign the Surety Bond Indemnity Agreement?
A surety bond indemnity agreement must be signed by the owner(s) of the business. This includes every person who owns 10% or more of the business.
Typically the indemnity agreement must also be signed by the spouses of the owners, even if they do not own any part of the business, and have no involvement in it.
Both business owners and their spouses must sign for reasons of security for the surety. If a claim is made and the surety compensates the obligees it will then look to the business for its indemnification. If the business does not have the means to repay the surety, then the surety will look to the owners and require them to return the compensation.
In some cases, business owners may transfer their assets to their spouses as a way of avoiding having to repay the surety. By requiring spouses to sign, the surety is asking for a guarantee that if a claim should arise, it will still be able to collect from the respective parties.
Can a Principal Not Repay the Surety?
Under the surety bond indemnity agreement, bond principals agree to repay the surety in the case of a claim. By providing the bond to the principal, the surety does not agree to lose money or suffer any loss if there is a claim - only to extend coverage in the name of the principal and have it returned afterwards.
If a principal declines to indemnify the surety upon the payment or settlement of a bond claim, the indemnity agreement allows the surety to take legal action against the principal.
Further Important Provisions of the Indemnity Agreement
Indemnity agreements for surety bonds may differ in their scope, provisions and conditions. Indemnity agreements, such as those for contract bonds, may feature a number or all of the following provisions:
- General indemnification provision - the requirement for the principal to repay all losses, costs, fees and expenses carried by the surety in the case of a claim.
- The right to enforce the indemnity agreement provision - this provision allows the surety to sue to principal and all other responsible parties if they do not comply with the provisions of the indemnity agreement.
- The right to settle provision - this provision grants the surety the exclusive right to decide whether claims against a bond should be paid, settled or defended. The provision further requires principals to agree with the surety’s decision.
- The right to examine books and records provision - according to this provision the surety is given the right to examine the books and records of the principal upon issuing such a request to them. This provision is supposed to help the surety when investigating a claim.
- The duty to cooperate provision - under this provision bond principals and indemnitors agree to cooperate with the surety when a claim is investigated, arbitrated, litigated or else.
Depending on the type of bond you obtain, your surety bond indemnity agreement may include even further provisions and requirements.
Do all Bonds Come with Indemnity Agreements?
Not all bonds require an indemnity agreement. Typically, bonds which have a higher bond amount require principals to sign an indemnity agreement. This is so because a higher bond amount translates into a higher risk for the surety, should a claim occur.
For that same reason, sureties will also perform credit checks on applicants, in order to determine the potential or risk of a claim and set the rate at which the applicant can obtain the bond.
If the risk for a claim is minimal and the bond amount is low, sureties will often issue bonds without performing a credit check. In those cases they may also not require a surety bond indemnity agreement to be signed by the principal.
For more information regarding indemnity agreements, surety bond claims and surety bond cost, contact our surety bond experts at 866.450.3412. We look forward to hearing from you and providing you with information and assistance!
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