Signing an indemnity agreement is a standard procedure when obtaining a surety bond.
It is second to the last step in the bond process – just right before the bond is issued.
As the word suggests, indemnity means protection or compensation for any loss. But who is the indemnity agreement protecting?
At first glance, it is clearly the Surety. But upon closer inspection, you’ll realize that the Principal will benefit from one, too.
So, what is it really? What makes an indemnity agreement crucial to a surety bond contract?
Surety Bond Indemnity Agreement Defined
Let’s take a quick recap first of what a surety bond is.
A surety bond serves as a guarantee to the Obligee (the person whom the bond is being obtained for) that the Principal (the person obtaining the bond) will fulfill his obligations. If he doesn’t, the Surety (the surety bond provider) will pay the Obligee.
An indemnity agreement is a legal contract that the surety uses to list down a surety’s common law rights as well as contractual rights.
When a surety bond is issued, common law allows the surety to be reimbursed if the principal defaults on his contractual obligations.
That’s one of the common law rights of a Surety. Here’s the complete list of the three common law rights of a surety:
Right of Reimbursement – under the common law, the Surety has the right to be paid for its losses by the Principal.
Right of Exoneration – the surety has the right to ask the Principal to fulfill his or her primary obligations.
Subrogation Rights – this simply means “standing in the shoes of another party” for the Surety’s protection.
Let’s take one of the most issued bonds as an example for the subrogation right of a surety: contractor performance bond.
Contractor A (Principal) obtained a performance bond from Surety Bond Authority for a road widening project.
Contractor A sought the help of Subcontractor B to add gravel to the road. Subcontractor B accepted the offer by entering into a legal agreement with Contractor A.
Halfway through the project, Subcontractor B backed out. Surety Bond Authority then paid for the remaining part of the road to be fixed.
Because of Subcontractor B’s default, Surety Bond Authority stepped into the shoes of Contractor A by asking Subcontractor B to reimburse its losses.
Common Law vs Statutes
Common law is different from statutes. The former operates on the doctrine of precedent; meaning the rights of a surety under the common law were established via the previous decisions made by Judges in similar cases.
The precedents, in turn, originated from the Statute of Frauds. Under the Statute of Frauds, certain agreements must be in writing for it to be enforceable.
Statutes, on the other hand, are enacted by legislative bodies such as Congress.
Surety’s Contractual Rights
Contractual right is the expanded form of a surety’s common law right. The rights of the Surety are provided in detail rather than in a generalized form.
Some of the Surety’s contractual rights are listed below:
- The Surety has the right to ask the Principal to pledge a collateral for any impending liability.
- The Surety has the legal right to sue one or all of the indemnitors for the full amount of the loss.
- The Surety has the right to check the indemnitors books and records.
- The Surety has the right to file the agreement as a UCC filing for the purpose of claims.
Types of Indemnity Agreement Forms
There are 3 standard indemnity agreement forms that sureties use. These are as follows:
Individual/Personal Indemnity Agreement – this will be an agreement between the Principal and the Surety. As the primary purpose of the agreement, the Principal will pay the Surety the equal amount of money that the Surety paid out on a claim.
General Indemnity Agreements – used for multiple bonds.
Subordination Indemnity Agreement – this means that the creditors of a bond’s Principal will subordinate their rights against the principal and its assets.
It’s not enough to spell out the terms of the agreement in black and white. A valuable part of the agreement is assent or the acceptance of what’s written in the indemnity agreement.
On the part of the Principal, assent will be shown by signing the indemnity agreement. The surety will demonstrate its assent by executing the bond on behalf of the principal.
So the big question now is, will the indemnity agreement benefit the Principal, too?
Yes. First off, by knowing that he or she will be liable for any mishap as well, the indemnity agreement will influence the Principal to work well in order to accomplish his or her goals.
Depending on the type of surety bond, there will be provisions in the indemnity agreement that will allow the Surety to negotiate resolution of claims or provide funding when required.
If you have further questions about the indemnity agreement or if you need a surety bond ASAP, contact us today. We’ll be happy to assist you!