The indemnity agreement for surety bonds is one of the most important parts of any surety bond commitment. It’s also one of the most misunderstood. In this blog, we will cover everything you should know about surety bond indemnity agreements.
The Basics of Bonding
Every surety bond type involves a legally-binding arrangement between three parties:
- The principal must obtain the bond
- The obligee writes the bond requirements and may file claims for damages if those requirements aren’t met.
- The surety underwrites the bond by agreeing to settle all valid claims
The indemnity agreement for surety bonds adds another obligation to this arrangement. It involves just two of the parties:
- The principal (or indemnitor) must repay the surety for any claims it settles.
- The surety (or indemnitee) will settle claims, but since they do not have the financial liability for those claims, they may seek compensation, with interest and fees, from the principal.
Who Will Need an Indemnity Agreement for Surety Bonds?
Most bond seekers will need to sign one of these agreements while getting a surety bond. Bonds that do not require a credit check may not involve an indemnity agreement since they are lower-risk. Higher-risk bonds, on the other hand, will always involve a formal agreement that obligates the principal to repay the surety following a claims settlement.
Why Do Surety Bonds Involve an Indemnity Agreement?
The whole point of surety bonds is to discourage illegal, unethical, or otherwise non-sanctioned conduct by making the bondholder accountable for any damages that result. Many professional licenses and formal contracts require surety bonds because they establish a bond of trust between two parties. That trust depends on making one party accountable to the other.
Surety bonds create that accountability by guaranteeing settlement for valid claims. However, the surety pays the settlement because they know that the principal must repay them under the indemnity agreement. Without that agreement, the surety bond would not serve its intended purpose: to make the principal accountable for the damages they cause.
What’s Included With an Indemnity Agreement for Surety Bonds?
Every bond provider writes their own indemnity agreement. The language and details will vary, but most of these agreements will include the following sections:
- Indemnity Provision – This important provision transfers risk from the surety to the principal. It will usually be written in broad terms to cover various types of liabilities.
- Right to Enforce – By agreeing to this provision, a principal agrees to cover all the surety’s financial losses, including attorneys and investigations fees.
- Right to Settle – Under this provision, the surety gains the right to decide how to respond to a claim. This clause gives the surety the right to act on the principal’s behalf.
- Books and Records – When an indemnity agreement includes this clause, the surety has the right to examine the principal’s books and records to evaluate financial assets.
- Duty to Cooperate – A principal is bound to participate in a claim investigation when they sign an agreement with a duty to cooperate provision.
How Does an Indemnity Enforcement Work?
An indemnity agreement can be enforced in several ways. One way is with collateral. The bond provider will require the principal to put up collateral (cash or property) equal to some or all of the coverage amount. If the surety later has to settle a claim, they will keep the collateral as repayment from the principal.
Another way that indemnity agreements give the surety the right to recoup their losses is by granting the right to sue. The parameters will be spelled out in the agreement. Since the agreement makes explicit what the principal failed to do (repay their debt as required), the surety has a strong chance to win a civil case and get the courts to force repayment.
How to Sign an Indemnity Agreement for Surety Bonds
The signing process may be more involved than expected. The surety will provide a copy of the indemnity agreement for the principal to sign. Any business partners or stakeholders with more than a 10% interest in a business seeking a bond must sign as well since they will share in the indemnity following a claim.
In addition, the principal’s spouse will need to sign to prevent someone from transferring assets to their spouse to avoid their financial obligations to the surety. This also puts the spouse on the hook to cover the principal’s debts if they go unpaid.
Obtaining a Surety Bond
Signing the indemnity agreement is just one part of the process through which someone obtains a surety bond that meets the requirements outlined by the obligee. That process will be different depending on the bond provider and the type of surety bond being sought. But these steps will probably be involved:
- Find a trusted surety agency.
- Complete a standard bond application.
- Submit to a credit check.
- Provide any other required documentation, like a financial statement.
- Wait to receive a quote for the price of the bond premium.
- Pay the premium and turn over any collateral necessary.
- Sign the surety bond agreement and the indemnity agreement.
- Receive a proof-of-bond-coverage document.
How to Handle Indemnity Obligations
Under the indemnity agreement, the principal cannot avoid their liability to the surety. They will have to pay for claims one way or another. The longer that claims go unpaid, the larger the debt becomes. Therefore, anyone who signs an indemnity agreement needs to understand their exact obligations under the bond agreement to avoid anything that could lead to claims.
If a claim does occur, the principal should settle it directly with the obligee rather than involving the surety. When the surety has to pay a claim and then enforce the indemnity agreement, it often results in loss of bond coverage, even if the principal pays. Things can get very complicated for someone who loses bond coverage they are required to have by law, under contract, or at a judge’s orders. Therefore, claims should be avoided at all costs.
Viking Bond Service – Working on Your Behalf
Just because the indemnity agreement makes the principal liable to the surety doesn’t mean the surety won’t work hard on the principal’s behalf. A good surety agency will streamline the bonding process to make it quick to obtain a bond and easy to understand the details (like the indemnity agreement). A good one will also investigate all claims thoroughly to reject any invalid claims, and fight on the principal’s behalf to make the claims process fair and transparent. Much depends on having the right surety agency in your corner.
For a surety agency you can trust and rely on for any and all bonding needs, choose Viking Bond Service. We serve all 50 states, have years of experience and expertise in the bond industry, and work hard to help people obtain the bonds they need (even with bad credit). Everything someone could want from a surety agency comes standard from Viking Bond Service.
Request a bond quote at any time. We fulfill most requests in under 24 hours. We also have a team standing by to answer questions and provide more info. Contact us or call 1-888-2-SURETY (1-888-278-7389).