This is Part 2 of our two-part post on indemnity agreements. Catch up with with Part 1 here.
In the simplest of terms, general indemnity agreements are a type of indemnity agreement that expands the rights of surety companies. Surety companies make customers sign them before bonding in order to ensure that they will be paid back if there are losses on the bonds they issue.
General indemnity agreements are useful for companies that buy bonds often or in many different states and municipalities. General indemnity agreements are generally longer than other kinds of indemnity agreements. Many contractors that work in the public sector will sign general indemnity agreements to streamline their bonding process.
The purpose of this post is to put some key definitions and clauses contained in typical general indemnity agreements into a more digestible form. Because general indemnity agreements are pretty common, and it is important to know what they say. These important definitions and clauses are pretty standard in general indemnity agreements. These explanations should help you to have a bit more clarity about the document you are signing.
Bond – A bond is any surety bond, undertaking, instruments of guarantee or other surety obligations the surety company issues on behalf of any Principal.
Bonded Contract – A contract that the surety company issues or has issued a bond for.
Default – A Default is considered to be a time where the principal or indemnitors fail to pay a bond premium, forfeit a bonded contract, fail to pay subcontractors for labor and materials needed for the bond contract, fail to abide by this agreement, file for bankruptcy, and generally does anything that impedes the rights and well being of the surety company.
Loss – A loss is any kind of liability, fee, charge, cost or expense that the surety company incurs because of bond they issued. Losses include money posted by the surety company as a reserve for potential losses, all costs resulting from investigating, paying or litigating any claim or enforcing this Agreement. This includes legal fees, professional and consulting fees, and witness fees. A loss can also be an unpaid premium and unpaid loans by the principal to the surety company. Essentially, if you are in a situation where you owe the surety company money or you cause the surety company to have to owe someone else money, that is a loss.
Premiums – This clause states that the indemnitor/bond principal will promptly pay all premiums, costs and charges the surety company requests for the issuance of any bonds.
Indemnity – This clause is a staple of general indemnity agreements. It states that the indemnitors agree to indemnify the the surety company and not hold them legally responsible for any loss incurred because of requests to execute bonds, failure by indemnitors to comply with the conditions of the agreement, or in the enforcing of this agreement. Indemnitors also agree to indemnify the surety company for bonds issued in the future, under this agreement. If there is a claim filed on the bond, indemnitors will accept the evidence provided to them by the surety company. If there are other, separate suits brought up under this agreement, it will not block action by the surety company. The surety company can choose to involve themselves in the actions of the indemnitor or principal in order to seek indemnity, but they can also abstain. They are under no obligation to to exhaust resources before pursing action against the indmenitors or principal for indemnity. By signing general indemnity agreements, principals and indemnitors sign away their right of indemnity against one another until they have fulfilled all obligation to the surety company that are included in this clause. The surety company not only has the right to, but it can and will intervene in actions between indemnitors and the principal in order to enforce this provision.
Posting of Collateral – Indemnitors may have to post collateral for the bond principal. This clause states that indmenitors agree to immediately post collateral at the demand of the surety company in the following amount: the amount of reserve established by the surety company for the singular purpose of covering losses or the amount of loss or potential loss, including legal expenses, in relation to claims or other liabilities. The surety company can use any or all of the collateral at its own discretion for the purpose of settling or paying a claim. If the surety company demands collateral from more than one principal or indemnitor, the surety company can determine how much surety is required. If the surety company allows the principal or indemnitor to deposit less, than they can, from time to time, increase the amount of collateral to higher than the original amount. If indemnitors are unable to do a cash deposit, the surety company can accept alternate forms of security. The surety will refund any unused deposits.
Assignments – This clause says that in the event of a default, indemnitors sign over their rights under all bonded contracts. This includes their right, title and interest in all subcontractor and purchase orders It also includes all equipment and materials used to fulfill the bonded contract, all claims against any party to the Bonded Contract or a third party related to the bonded contract, all sums that are due or will become due under the Bonded Contract. Another big thing it includes is all rights to patents, patented processes, licenses, designs, copyrights, trademarks and intellectual property pertaining to the work of the bond and any other rights to payment from any person or entity under the bonded contract.
If the surety company receives excess money of the total amount of the loss, the surety company can put the extra money towards other losses or potential losses. Those potential losses can cover the same bond, other bonds or other Bonded Contracts. In the event of a default, principals and indmenitors can agree to appoint the surety company as their attorney in fact. If they do this, the surety company will have the power to endorse and sign in the names of the principal and indemnitors on documents related to the bonded contract, receive and use the proceeds of checks, and pay project owners or obligees or anyone the surety company needs to. Some companies will require indemnitors and principals to allow them to be the attorney in fact, but not all.
Takeover – In the event of a default, the surety company has the right to take possession of the work under the bonded contract or bonded contracts. They also have the right to complete it at the expense of the indemnitors. The surety company can essentially do whatever it needs to, without limitation, to fulfill the obligations of the bond.
Claims – The surety company has the exclusive right to determine with claims, liabilities or suits they paid. That decision is final and binding. Surety companies make the decision of what claims to pay out without the consent of the principal or indemnitors. The surety company is entitled to indemnity for any and all payments it makes in good faith. This good faith applies to all payments the surety company makes except those with willful wrongdoing. If the principal or indmenitors wish to litigate with the surety company, they must have a cash deposit or collateral with the surety company.
Surety’s Right to Decline Bonds – Even though general indemnity agreements are used to get bonds, this clause gives surety companies the right to refuse to write bonds. If the surety company decides to decline the request for bond issuance, that does not release the indemnitors from this agreement. The surety company can therefore grant bonds when they want to, but if they don’t want to because they don’t like the terms of it, for example, they don’t have to. They don’t have to and it does not affect the validity of this agreement or take any rights away from the company. This clause ensures that principals and indemnitors do not have a claim against the surety company if the surety company refuses to write or issue a bond to them. If there is evidence of willful wrongdoing on behalf of the surety, it is the principals’ and indemnitors’ job to prove it. If indemnitors and principals want to litigate wrongdoing, they must post collateral with the surety company that includes all costs and legal fees.
General indemnity agreements are legally binding contracts that protect the surety company in every way from harm. They are a necessary component of obtaining surety bonds. While they seem scary, if you as the bond principal operates business responsibly and ethically, there is no need for claims or losses to ever be filed on your bond. While this post does not cover ever clause contained in the general indemnity agreement, they showcase the main points of it.
This agreement will never come to fruition as long as you operate business the way you are supposed to. This agreement exists to protect the surety company should you fail to do that.