Why Do Bonding Companies Require an Indemnity Agreement?
As a condition of issuing a bond, bonding companies all have an absolute requirement that the business and its owners sign an indemnity agreement. There are three elements to the Indemnity required by Bonding Companies, Business, Personal and Spousal. Here is why indemnity is required:
BUSINESS INDEMNIFICATION
A Surety Bond is a guarantee being made on behalf of your company (the Principal on the bond) by an Insurance Company (the Surety) guaranteeing that your company will complete a contract and pay their bills. If the Principal (your company) fails, the Surety will step in and complete the job and pay your bills thus guaranteeing the Obligee (the owner of the contract) is made whole. The Surety can not make this guarantee on behalf of your company unless your company is committed to stand with the Surety in making sure the work is completed and the bills are paid. Otherwise, on a bonded job where no indemnity was given, if costs escalate or conditions deteriorate, the Contractor may be enticed to abandon the job for the bonding company to complete. The indemnity agreement means your company can not abandon the job, rather it must remain committed to completing the job, at all costs. A Surety cannot make a promise under the bond without this commitment from the Principal.
PERSONAL INDEMNITY
As outlined above, a Surety needs the absolute commitment from the business they bond that every effort will be made to complete the job and pay the bills. The Surety also needs the same commitment from the owners of the business (and their spouses). The Surety must know the owners of a business will stand with the Surety and exhaust all personal resources in making sure the work is completed and bills are paid. AND… the Surety must know the business owners (and spouses) will not make excessive withdraws of money from the company, (i.e. extra salary, bonuses or dividends) while bonded jobs are being completed, since such withdrawls could impair the company’s ability to complete the bonded job. Without personal indemnity the business owners may be reluctant to invest personal resources to guarantee completion of a job. Without personal indemnity the owners might also be enticed to withdraw funds from the company if they see “storm clouds” on the horizon while bonded jobs are being completed.
SPOUSAL INDEMNITY
The personal commitment from the owners of a business, required by the bonding company, extends to the owner’s spouses. Spousal indemnity is nearly always required by the bonding companies, with few exceptions. For a detailed discussion of why Spousal Indemnity is required, see our Blog Post “Why Does My Spouse Have to Sign?”
DISCLAIMER: This information is given for general information purposes only and should not be relied upon by any bond applicant or indemnitor as legal advice or legal guidance regarding the subject of business, personal or spousal indemnity. Bond applicants and indemnitors should seek the advice of an attorney for guidance on this subject matter.
RESERVATION OF RIGHTS: Notwithstanding any statement made herein, The Bond Agency and the Surety Companies they represent fully reserve their rights with the understanding that any statements made herein do not constitute a waiver of any defenses available under a bond or applicable law or a waiver of any potential actions under any agreement, bond or applicable law resulting from of any claim under any bond issued by The Bond Agency or their Sureties.