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As a follower of the “Secrets” series, you may already know what a General Indemnity Agreement (GIA) is, and that it is a requirement all bond applicants face. Basically, it contains a payback obligation to the surety similar to a promissory note.
As a bond applicant, why should you be cautious when signing such documents?
The first reason is that it may include companies or individual people who are inappropriate. Some examples:
- An affiliated company in which the bond applicant has a minority interest. These should be excluded if the bond client doesn’t have a controlling interest.
- Another example would be an individual person with little or no ownership in the company who is not married to an officer, key person or major company owner.
The second reason is that there may be clauses in the indemnity agreement that may be subject to negotiation – although underwriters tend to resist such modifications. Nevertheless, if you see something objectionable such as “Confession of Judgement” which is not even permitted in some states, you should ask for it to be removed.
This would also be the time to ask for additions to the document, such as a dollar limitation on personal indemnity of certain individuals (Spouses? Minority owners?) or Trigger Indemnity which is only activated under specific circumstances. No harm in trying.
The third reason is because of the gravity of the indemnity obligation. Through the GIA, the bond applicant company and its owners agree to repay the surety for losses and expenses. They are literally putting everything on the line.
What is the dollar limit of this obligation? Is it:
a) The contract amount?
b) The Payment Bond amount? or
c) The T-list of the surety?
Answer: The liability amount is unlimited.
This is a big deal. Keep in mind (see Secret #1!) “Bonds Are Not Insurance.” The surety is a guarantor of the principal’s performance. If the contractor fails to perform, the bond is not insurance to protect them from the consequences of their failure.
In conclusion, the bond applicant should approach the signing of a GIA with some caution. Certainly it is a document to read and manage where possible but this brings us to the final point: If you want surety bonds, it is mandatory that the surety be indemnified. Regarding the indemnity of spouses not active in the business, they too must sign. We tell contractors “Nobody likes it, but everybody has to do it.”
If you want bonds, be cautious, but get ready to sign on the dotted line.
Insurance Agents and Contractors: When tough bonding situations arise, we have the markets and the know-how to succeed even when others have failed.
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Not available in all states including Idaho.