Unlike the insurance industry, a necessary tool in the surety industry is the utilization of indemnity agreements. So….what exactly are indemnity agreements?
Indemnity agreements are a contract that binds a principle (business owner) to a surety bond carrier. Indemnity agreements outline exactly how the surety bond works, who is involved, and what will happen over the course of the bond being in place. There are multiple parts of an indemnity agreement which I have broken down for you.
This section has the general information that a surety carrier would require in order to make an underwriting decision, have full disclosure, and would contain the pertinent information required should a claim occur so they can contact the principal for re-payment. Some surety carriers will allow a generic application to replace this part of the agreement as long as the main points are included.
In this section a surety carrier will carefully and fully outline the expectations of the underwriting process, terms of agreement, payment terms, claim terms, personal credit disclosures, claim payment and re-payment terms, bond renewal terms, and typically ends with non-renewal or cancellation obligations of all parties involved.
The last and most important section of the indemnity agreements will be the signature section. This is where the principal signs in good faith that they will conform to the agreements set forth. The typical indemnity agreements will have multiple sections. They are broker down below.
- Corporate Indemnity – this section is signed by the President, Managing Member, Sole Proprietor, or Majority Shareholder of the company.
- Personal Indemnity – the section is signed by the Corporate Indemnitor, their spouse (if applicable), any minority shareholder with 5% or more ownership, and their spouse if applicable
- Notary Section – Many short form indemnity agreements do not have a section for notary completion but for larger or riskier bonds they may have a notary section that will need to be completed. This insures whoever is signing the agreements are who they say they are and have proven it.
One question that always comes up when a principal has received the agreements for review and signature. That question is “Why does my spouse have to sign these agreements? She has nothing to do with my company”. The term for this is called Spousal Indemnification. The reason your spouse is required to sign the agreements is two-fold. The first is more of an ethical reason. Why would a surety company be willing to take a risk on you and extend you “surety credit” if your spouse is not willing to sign on your behalf? It presents a red flag. The other reason is more of a financial reason. In the past when a potential claim situation arose there were business owners that were married. The business owner knew there was a potential for loss so they transferred their entire asset pledge to their spouse leaving them essentially unable to repay a claim should one come to light. If the surety has the spouse sign on the agreement that prevents this situation and ensure they will have access to any funds for claim reimbursement. The only time this requirement could possibly be waived would be proof of a pre-nuptial agreement or advanced divorce proceedings.
In conclusion, if you plan on getting a bond to secure your business license, bid on public work, secure a permit requiring a bond, or become bonded by the court you will be required to sign an indemnity agreement. Each surety carrier has their own agreement, and they may differ greatly. Read the document carefully before you sign and remember there is nothing wrong with asking questions.