Indemnity Agreements for Surety Bonds

Indemnity Agreements for Surety Bonds

We are often asked questions as to why a surety needs personal information when qualifying a company for a bond. This all has to do with the principle of indemnity. The surety bond product itself would cease to exist without this principle. In this post, we will try and address the most frequently asked questions in regards to personal guaranty and indemnity agreements.

Before we answer these questions, here’s a refresher to the three parties of a surety bond:

Principal – this is the party qualifying for the bond
Obligee – this is the party requiring the bond and is protected by the bond
Surety – this is the party guarantying the work of the principal

What is a General Indemnity Agreement? This is the principal’s guarantee to the surety company that if the surety pays any loss to the obligee, that it will reimburse the surety for that loss, including attorney and legal fees.

What is my Maximum Liability? With most bonds, it’s the amount of the penal sum of the bond, plus legal fees. However, contract bonds such as performance and payment bonds, guaranty a specific contract, so the liability could be much more than the penal sum of the bond. To be put simply, your maximum liability is the potential loss a surety company could pay out.

I’m Incorporated. Why do you Need my Personal Information? A personal guarantee is required for nearly all surety bonds. A surety needs the personal information of the applicant, including social security number, home address, along with the same information for their spouse in order to run credit. Credit is one of the first and main underwriting criteria for bonds.

Why do you Need my Spouse’s Information? This has to do with the fact a personal guarantee is required for bonds. A marriage legally joins the assets of the two people getting married, including business assets. It doesn’t matter if the spouse has no ownership in the business. Because a personal guarantee is required, a spousal guarantee is one and the same.

A surety bond is a financial guarantee. In most cases, once you’re married your financial obligations become your spouse’s financial obligations and vice versa. Having your husband or wife indemnify your surety bond is how the underwriter ensures state laws regarding financial accountability are being followed when issuing your bond. Spouses have joint assets, which may have to be sought after in the event of a claim. If the surety does not have the spouse’s guarantee, they would not have access to any assets jointly held.

Can I get a Bond if I’m Not Willing to Personally Guarantee? Probably not. Very rarely is a bond written without a personal guarantee and a surety would only be willing to accommodate if the corporation was so strong on its own, relative to the risk. These usually revolve around larger companies with longstanding relationships with sureties, along with the financial presentation and strength to easily back the bonds. A surety usually views this as – “If you are not willing to personally guarantee your own obligations, why would we?”

I Still Don’t Understand. Isn’t a Bond Just Insurance? No, it’s not. While insurance expects that there will be a loss, and sets premiums accordingly based on the law of large numbers, a surety bond expects zero loss. Think of a surety as a professional co-signer. It is guarantying your obligation to another party.

We hope this addresses most of the questions regarding indemnity agreements and personal guarantees. If you have any questions or need clarifications please give us a call at 617-773-9200

 

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UPDATE Quincy Office moving on May 24th, 2021