What is an indemnity agreement?

An indemnity agreement is a contractual agreement that serves as a risk transfer mechanism, in which one party is transferring risk to another party. Indemnity is compensation for damages or loss, it may also indicate an exemption from liability for damages. Indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. If a surety is asked to incur costs on the principal’s behalf, they will expect to be reimbursed. The terms and conditions of the indemnity agreement are important to understand.

A general indemnity agreement (GIA) is a document that outlines the surety and client relationship. A GIA typically includes promises and agreements, by which the indemnitors and the surety company agree to abide. The GIA obligates the principal and named indemnitors to protect the surety company from any loss or expense that the surety sustains as a result of bonds issued on behalf of the bond principal. If the principal fails to fulfill its bonded obligation and the surety suffers any loss, the principal and indemnitors are legally bound to indemnify the surety for its losses. Indemnity can be defined as compensation for loss or a restoration to the approximate financial condition occupied before the loss occurred. The GIA provides the surety with a means to be reimbursed if it incurs losses and costs under the bond it issues for the principal.

Why is a GIA needed? The bond outlines the obligations and requirements owed to the oblige by the principal. It does not clearly state the relationship to the surety. The GIA provides the surety legal protection in the event a claim is paid on the bond. This document confirms that the principal and indemnitors are solely in charge of reimbursing the full costs that the surety incurs due to a claim on the bond. The GIA is a powerful legal contract that provides a surety issuing with many enforceable legal rights against the principal and indemnitors that signed the GIA.

When obtaining a surety bond, most bond companies will require an indemnity agreement. Several people may need to sign the indemnity agreement in addition to the bond applicants and principal. These may include all business owners and investors controlling 10% or more of the company. Owners need to sign the GIA both as individuals and in the name of their company. It is a common practice that spouses of principals, owners, and investors also sign the indemnity agreement.

The main purpose of the indemnity is to secure compensation to the surety in case of a claim is made on the bond. By issuing a bond, the surety assures that the principal will fulfil its obligations. If the principal fails to meet its obligations, the surety may be required to initially cover the financial costs of a claim prior to seeking repayment from the principal and indemnitors. This is why many surety companies require collateral. If the bonded party defaults on its repayment to the surety or does not comply with other provisions in the GIA, the indemnity agreement is the surety’s only legal protection.

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