This may be one of the most challenging aspects when you’re dealing with Surety Bonds.
- “What’s the point of having a bond if I have to give personal indemnity?”
- “How come I pay a bond fee and sign personally?”
- “There is no reason for my spouse to sign – (s)he isn’t active in the business and (s)he didn’t have to sign for the bank.”
These are some of the questions and objections. But the fact remains: Sureties require indemnity, and routinely require “full personal indemnity.” So let’s look briefly at why this is the case, and then move on to the Tips and Tricks.
“Secret #1” explained that Bonds Are Not Insurance. They are more like a lending relationship with a bank. Unlike insurance, there is no risk transfer and the surety expects to be protected from financial loss (like a bank on a loan). The General Indemnity Agreement (GIA) accomplishes all of this.
The company indemnity of the firm that has applied for the bond is needed, and the personal indemnity of the company’s owners and spouses. When we say “full indemnity” we mean the applicant company (the “Principal”), its affiliates and subsidiaries, plus all owners and spouses.
Why do sureties demand this? It is because the parties that own / control the Principal benefit from the issuance of the bond, and are expected to complete the project without causing a bond loss. The surety’s loss ratio, and very survival, depends on this. The first effect of personal indemnity is that it impresses upon the indemnitors the importance of completing the bonded work and avoiding a bond loss. Ultimately, the GIA gives the surety the right to seek recovery if a loss does occur.
Tips
GIAs are generally similar from one surety to the next. It is also common for the language in the document to not be negotiable. Keep in mind, the document is intended to be one-sided, so don’t expect the Principal’s attorney to like it.
In addition to the Principal, the indemnity of companies owned / controlled by the people will be expected. Such companies (Affiliates) are identified by reviewing financial statements, tax returns, the Contractors Questionnaire, and the prior surety’s GIA.
The indemnity of foreign companies and non-U.S. citizens carries little weight with sureties. Can you guess why? (Answer at the end *)
The General Indemnity Agreement must be executed before the first bid or performance bond. It is called “general” because it automatically applied to all bonds issued after execution of the GIA, without naming them specifically.
A Corporate Resolution is needed when a company indemnifies on behalf of another. It reaffirms that the indemnity was intentionally / properly given and signed by a duly authorized person.
Spousal Indemnity is required, even if the person is not active in the business. The ownership in the company is usually considered marital property – owned equally by the spouse. Therefore both spouses benefit equally from the issuance of the bonds. Being active in the company has nothing to do with the need for spousal indemnity! Also note, if the active spouse dies, the inactive spouse automatically becomes the new active company owner whose decisions will directly affect the surety.
Regarding personal signatures, a “signature guarantee” by a bank is stronger (for the benefit of the surety) than a notary public.
“Obviously,” signers of the GIA cannot witness or notarize their own signatures. It is also expected that the witness to a signature will not also act as notary.
Tricks
Indemnity can be terminated at any time by following the notification procedure stated in the GIA. However, it remains in effect for bonds issued while the indemnity was in force.
When open or silent Joint Venture Partners and affiliates indemnify, they can help the Principal qualify for a bond. To accomplish this, their financial info will be needed.
Major subcontractors / suppliers that cannot bond their work can instead provide indemnity and financial info. (Keep the next point in mind.)
Company and personal indemnity can have a maximum dollar value stated which caps the liability. This would not be available, however, for the Principal.
Non-profit organizations may offer indemnity of limited value since they are not intended to accumulate profits or net worth. However, in some cases there may be individuals who personally will support the case – such as a church elder / benefactor who gives personal indemnity on behalf of the entity.
Trusts can give their indemnity if you obtain proof that the trust document allows this, and that an authorized person is signing the GIA.
Trigger Indemnity is only activated if stated circumstances occur, such as company net worth falling below a certain level or ratios that have declined.
Personal indemnity may be waived in the following cases:
- For owners with a very low percentage of ownership, such as less than 10% depending on the surety. (We use such a 10% guideline)
- Publicly owned companies (traded on the stock exchange) as stated in reason #1.
- Spouses who have no ownership in the Principal due to a pre-nuptial agreement.
- Spouses who maintain a separate balance sheet (assets exclusively belonging to them) may be waived if they sign a Non-transfer of Assets Agreement. This prevents the transfer of assets to escape the reach of the GIA.
Painful as they are, one good thing about GIA’s is that they may not need re-execution for years unless the Principal has changes in ownership or entities. Back in the year “1” when I started in the business, we obtained a specific indemnity agreement for every P&P bond. What a pain! Eventually everyone moved over to the “once and done,” GIA.
You love GIAs even more – now that you know some of the Tips and Tricks!
FIA Surety is a bonding company that has specialized in Site, Subdivision, Performance and Payment bonds since 1979. We get them done!
Call us with your next Surety Bond.
Steve Golia, Marketing Mgr. 856-304-7348
FIA Surety / First Indemnity of America Insurance Company, Morris Plains, NJ
*Subrogation by the claims department is unlikely in a foreign jurisdiction