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Insurance - Indemnity Agreement: The worst contract ever?

image Eric Lesch, Principal/Bond Producer, PCL Contract Bonding Agency, Irving, TX

AUSTIN - As a bond agent, indemnity of the surety company by the contractor is typically one of the most difficult items we deal with and unfortunately the purpose of which is commonly misunderstood. Using it properly is important for setting yourself up for success when using bonds to secure work.





    One of the main components in the foundation of a surety relationship is the contract between the contractor and the surety called the general indemnity agreement (GIA), or general agreement of indemnity (GAI). Indemnity is the guarantee to protect the surety from loss and reimburse the surety for any costs they may incur in the process of bonding.
    If you have had the pleasure of signing a GIA then you have probably gone through the various stages of disbelief and frustration as you read it. You think things like “What kind of sane person would sign this?”, “They must think I’m an idiot!” and “No way, I’m not doing it!” Then you get to the signature portion and realize, “My spouse has to sign this, too?”
    The GIA has language that gives the surety complete control and access to everything that a company or individual owns. As a contractor, it will likely be the most one-sided contract that you will ever sign. So then, why would anybody agree to it?
    The reason is a very simple one; you won’t get bonding unless you sign it.
    Ok, but do they really need personal indemnity?
    Typically, the answer to that is “Yes.” The primary purpose of personal indemnity is to keep your attention on your bonded projects. As the owner, you are likely the most qualified person in your business and if you disappear when times get tough the surety is going to have a very hard time investigating and completing the project without incurring a substantial loss. Personal indemnity is the best way to keep you involved in the process. The surety is not a contractor, they can lose money very quickly on a bad project and having you around to reduce their loss is a huge benefit to them. So much so, that a very smart and cooperative owner can greatly reduce the likelihood of a surety even coming back to them to collect for losses.
    Also, having personal indemnity allows them to worry less about the boundaries between your personal and company assets. With every person or entity that signs, more assets and worth can be brought to the support of the bondability of your business. The also means that you have more freedom in how you use your assets because they don’t have to be kept solely in the business.
    I promise to stick around and meet my obligations. Why do they need my spouse’s personal indemnity?
    Partly to make sure your spouse knows what you are signing and partly because your spouse will likely gain control of your ownership in the event something bad happens to you. It also helps protect the surety from things that may have been withheld like other companies or trusts.
    Does everybody have to do personally indemnity with their spouse?
    Having personal indemnity of all owners, including spouses, is the standard way of getting indemnity in the surety business. Nearly all contractors receiving bonds, more than 95% of them, have full personal indemnity with spouses included, so it is very, very common.
Does the surety really take over my business and my personal assets as it says they could at any time they wish?
    The agreement is very one-sided and does appear to give the surety very broad power to do many things that would be very bad for you. However, our experience with highly rated and professional surety companies is that they give you every chance to fix the problem and can provide very substantial help if asked. Remember, the GIA is intended to keep you willingly involved. Many of the things they have reserved the right to do are there for people that refuse to participate.
    So, do you just close your eyes, hold your nose, and sign it, or do you try to find a way around it?
    Well, that depends on your bargaining power. The main factors that give you leverage are your financial strength, past performance and hunger of the overall surety market. Your agent can pair you up with the best surety and help you determine what options you have.
    There are many options that range from full indemnity to just the indemnity of the company with no personal or outside indemnity at all. There are pros and cons to each and the right answer is not always the complete removal of all personal indemnity. Having full indemnity gives you the most bonding flexibility, while having no personal indemnity gives you the least exposure, but limits your bonding flexibility the most.
    If you are considering the sale of your business then the handoff from current owner to new owner can be tricky when bonding is involved. If you do a lot of bonding then it is crucial to the value of your business.
    Talk to your surety professional about it to see what makes the most sense for you.

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