While indemnity agreements are standard documents for getting a surety bond, not many people know what they do. Indemnity agreements can be difficult to understand if one isn’t familiar with legal jargon. This blog post aims at adding clarity to what indemnity agreements are, who must sign it, and why they’re necessary.
What is a Surety Bond?
Surety bonds essentially guarantee something. They are an agreement between three different parties that (usually financially) guarantees something. The three parties involved in surety bonding are the the principal, obligee and surety company. The surety company is the entity who issues the surety bond. The obligee is the entity requiring the surety bond. Finally, the bond principal can either be a person, entity or business, and they are the party that has to purchase the surety bond.
To ensure maximum clarity moving forward, it’s helpful to know what the following terms mean. The surety company, also called the Surety, is the company that writes and issues the bond. Surety companies take financial responsibility for paying initial losses on the bond. The surety company is the company that you, as the bond principal, must pay back if there are losses on the bond. Next is an indemnitor. Indemnitors sign the indemnity agreement because they have a stake in the bond. These are the people who must compensate the surety company if there is a loss paid out on the bond. Indemnify means to repay someone or something. If a loss is found on a bond, the indemnitors must indemnify the surety company. The term indemnity means security against financial harm or loss. Therefor, indemnity agreements protect the surety company from loss stemming from your bond.
What is an Indemnity Agreement?
An indemnity agreement is a promise that as an indemnitor or bond principal, you will indemnify the surety company if there are losses on a bond. Indemnity agreements are between the surety company and bond principal to ensure that the surety company will be made whole once they pay out a loss. It, in no uncertain terms, states that no matter what, the surety company will be paid back if the pay out a loss.
As stated in the definitions section, indemnitors are people who sign the indemnity agreement. Indemnitors protect the surety company from real financial loss because they bear the financial burden of indemnifying the surety company. Indemnitors, through indemnity agreements, are legally bound to pay the surety company back. Indemnitors are a bit like cosigners for a loan. If there’s a loss found on the bond and the surety company pays it out and the bond principal does compensate them, then financial responsibility for paying the surety company back falls to the indemnitors. So, the question becomes: how are indemnitors chosen?
First, if the bond principal is required to be an indemnitor. If the bond principal is just a singular person, he or she and their spouse must sign the agreement. But if the bond principal is a company or business entity, the owner is required to be an indemnitor. If the bond principal is a company, the owner must be an indemnitor and additional indemnitors are usually those who have a vested interest in the company trying to obtain the bond. More people have to be indemnitors if the bond principal is a company. A guideline often used to determine who must be an indemnitor is any person, spouse or trust of any trust or owner who was 10% controlling interest in that company.
However, surety companies can use discretion regarding who signs as an indemnity agreement and there many exceptions pertaining to indemnitors. Most surety companies use 10% controlling interest as a guideline for finding indemnitors, though there are exceptions. For example, if a business needs a surety bond, there is a person with 5% controlling interest of the business and another with 95% controlling interest, both of them will likely have to sign as indemnitors. If the person with 5% controlling interest is seeking the bond, or if that 5% is particularly valuable, they will more likely than not have to be an indemnitor.
What is the Role of Indemnity Agreements in Bonding?
Indemnity agreements are necessary for getting surety bonds and the type of agreement can vary depending on the surety company and agreement type. Some types of indemnity agreements, like the general indemnity agreement, are favored by companies who often purchase bonds in many different states or municipalities. Indemnity agreements give surety companies additional rights when they write the bond and when they are seeking indemnity. Indemnity agreements protect the surety company from financial exposure and ensure there are people liable to indemnify the surety company. They, in short, ensure that the bond works. No surety company will write a surety bond if they can;t be paid back if there are claims on the bond. The indemnity agreement helps makes the bonding process work the way it should.