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.
Every surety bond type involves a legally-binding arrangement between three parties:
The indemnity agreement for surety bonds adds another obligation to this arrangement. It involves just two of the parties:
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.
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.
Every bond provider writes their own indemnity agreement. The language and details will vary, but most of these agreements will include the following sections:
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.
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.
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:
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.
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).
The surety bond industry entered a new era at the start of 2016 when the…
If you are a contractor that works in the construction industry, surety bonds will be…
If you have patience, persistence, and a perceptive eye for detail, you may thrive as…
How to Get Bonded for a Cleaning Business If you run a cleaning business, there’s…
A career as a car dealer can be interesting, secure, and lucrative too. But if…
A job as a public adjuster could lead to a long and fulfilling career. Before…