Understanding The General Indemnity Agreement

We live in interesting times, uncertain times, anxious times. It is difficult to predict what is going to happen to surety credit over the next few COVID-19 months (years?). It is likely, however, that sureties will rely on, more than ever, the general agreement of indemnity (GIA). As with any contract, it is far better for our client to read and understand the provisions of the GIA and to seek legal assistance, if needed, before executing it than to receive later a potentially unpleasant “surprise” when the surety seeks to enforce its contractual rights. Understanding the unfamiliar brings clarity and a sort of peace, which we are all seeking during this unprecedented pandemic.

A GIA is a standard document in the construction and surety industries. A surety company that issues a bond on behalf of a contractor or subcontractor almost invariably requires that its principal, the individuals who control the company and their spouses, and often affiliated companies execute the GIA. By issuing its bond, the surety assures that the principal will fulfil its obligations; and if the principal does not do so, the surety must step in and bear the cost of satisfactorily completing the contract and paying the principal’s subcontractors and suppliers for money due and owing. While a contractor/subcontractor bond principal has common law duties to indemnify and exonerate the surety against any loss sustained as a result of having issued a bond, a surety will not just rely on those common law rights. The required GIA provides the surety with contractual rights that expand its common law rights against the individual and corporate indemnitors. In addition, the GIA provides a tool for the surety to secure the cooperation of the principal.

A surety bond is not like traditional insurance; rather, it is like an extension of credit. A surety, by issuing a bond, provides its credit to the principal in order for the principal to contract with the obligee. Because the surety extends its bonding credit on behalf of its principal, the surety underwriter evaluates the principal’s financial capacity and ability to perform the contract. The surety, however, does not expect to incur a loss as a result of having issued the bond. Through the protections afforded the surety in the GIA, in addition to the surety’s common law rights, the principal and third-party indemnitors, both individuals and business entities, are required, among many other things, to reimburse the surety if the surety incurs a loss as a result of having issued bonds on behalf of the principal.

The GIA is a powerful instrument enhancing the surety’s goal to avoid losses in resolving claims and seeking salvage. Principals should understand that courts will generally enforce the provisions of a GIA, as written. Contractors and subcontractors executing such agreements should know that the GIA provides the surety extending credit with favorable rights and remedies in the event of loss and provides the principal for whom the credit is extended, and the indemnitors, including spouses, with responsibilities and obligations.

The specific terms of the GIA will vary among surety companies, but most GIAs contain certain typical clauses. Prudence dictates that a bond principal understand the provisions of a GIA before executing the agreement.

Please call Sonja Harris with Florida Surety Bonds Inc at 678-717-8745 or email at sonja@floridasuretybonds.com to discuss the GIA further. This is an important and required piece of bonding, so we encourage all of our clients to understand what they are signing before doing so

The author of this article is Martha Perkins, General Counsel at NASBP (National Association of Surety Bond Producers). She can be reached at mperkins@nasbp.org or 240.200.1270. This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in this article without such advice.