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What is an indemnity agreement?




What is an indemnity agreement,  why the surety requires it, and why you  have to sign it personally, even though your company needs the surety bond.

A surety bond is not an insurance policy. A surety bond is a 3 party transaction, (click here to see our video) versus a insurance which is a 2 party transaction. What does this mean? It means that the surety bond is provided for the benefit of a third party. The obligee, or the party requiring the bond, will collect from the surety in the event of a loss. In construction, this means that if the contractor (called the principal)fails to complete a bonded project, the Obiligee (usually a public entity) or owner of the project, can make a claim on the surety bond to insure the project is completed.  This type of bonding is generally referred to as contract surety and the bonds needed are performance and payment bonds. So what is an indemnity agreement? What is an indemnity agreementIf the principal (contractor) causes the surety a loss, the surety will expect the principal to make the surety whole. Remember, the surety bond is in place for the benefit of the obligee (not the contractor). The indemnity agreement is usually the only source of security the surety has to force the principal hold it harmless. The agreement reads much like a security agreement for loan. It is an onerous document, (much like a loan agreement form a bank) and, if you have any questions regarding the agreement, it would be wise to consult an attorney. That said, most sureties are not willing to make changes in the indemnity agreement so even if your attorney protests, you will most likely have a business decision to make.

Why do I have to personally indemnify the surety?

The short answer to this question is simple, you are asking the surety to use its assets to guarantee a contract. Why should the surety do that if you, as the owner of the company are not willing to put your own assets up. Keep in mind, if a contractor completes a contract per the terms and specifications, there is no loss to the surety and the indemnity agreement is basically moot. If a project is not going well, without a personal guarantee an owner may be tempted to simply walk away from the project thereby exacerbating the potential loss for the surety.

If you have any questions about anything surety bond related, feel free to contact the surety bond experts at Surety1.com, a service of Assured Partners of California, LLC.

 




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