Surety bonds are used in various business situations and court proceedings that require a guaranty of performance by an individual or company. Before providing the bond, the surety will require the bond applicant to demonstrate an ability to perform, as well as indemnifying the surety for any loss or damage due to a failure of the applicant’s performance. The individual or company providing the indemnity is called the indemnitor.
No surety will provide a bond without one or more indemnitor. The applicant must act as indemnitor and, in most cases, another individual or company will act as indemnitor as well. For example, when a surety provides a bond to a construction company so that it can obtain a contract for a large project, the surety will most likely require the principal owner or owners of the company to act as indemnitor along with the company. In criminal cases, a bail bondsman will often require a relative or friend of the defendant to provide an indemnity.
Evaluation of the Indemnitor
Before accepting an indemnitor on a bond, the surety will evaluate the indemnitor’s assets to determine the indemnitor’s ability to pay for any loss or damage suffered by the surety. The indemnitor will be required to pledge of some assets as collateral. Evaluation methods and the type of assets that are acceptable for collateral differ among sureties. However, most sureties prefer liquid assets, such as cash, certificates of deposit and irrevocable letters of credit.
After approving an indemnitor, the surety will require a written indemnity agreement signed by the indemnitor along with any other additional paperwork required for pledging collateral. The indemnity agreement is tailored to the requirements of the surety, but most agreements include provisions such as an identification of the pledged assets and an agreement to pay the surety for attorney’s fees, expenses or damages incurred due to any claim made against the bond. In situations where a company must regularly obtain a bond, such as a contractor, the surety and the indemnitors may make a general indemnity agreement that will cover all bonds issued by the surety to the company.
If a claim is made against the bond and the bond applicant fails to pay the claim, the surety has several options. The surety can pay the claim in full, settle it for a lesser amount or deny the claim. In any event, the surety will notify the indemnitor of the action it intends to take and make a demand upon the indemnitor to pay for the surety’s expenses and losses regarding the claim. If the indemnitor fails to pay the surety’s demand, the surety will pursue its rights against the indemnitor’s pledge collateral and file a lawsuit, if necessary.