Indemnitor Agreement: Everything You Need to Know
An indemnitor agreement is a contract that ensures the repayment of a surety in a surety bond agreement by the principal of the agreement.3 min read
An indemnitor agreement, also called an indemnity agreement, is a contract that ensures the repayment of a surety in a surety bond agreement by the principal of the agreement.
What Is a Surety Bond?
Surety bonds are agreements involving three parties in which something is guaranteed by the contract. The parties of a surety bond each will take on one of these three titles:
- The obligee.
- The principal.
- The surety.
The obligee is the person who needs the surety bond and is obligated to pay back their loan. The principal is the party that purchases the bond. The surety is the party that issues the bond to the obligee. An indemnity agreement comes into play in a surety bond as the agreement between the surety and the principal.
What Is an Indemnity Agreement?
Indemnity agreements are meant to minimize and transfer risk in a bond agreement. Basically, the principal takes on the risk of the contractor or obligee failing to repay the loan to the surety. The principal must pay the surety back for the bond, but the indemnity agreement doesn't involve the contractor. It ensures that the surety company and principal will each hold up their end of the bond agreement.
Most surety bonds require indemnity agreements, and they are a very valuable part of the bond process. Indemnity agreements can take various forms depending on the agreement and the parties involved. General indemnity agreements are the most common and are great for businesses purchasing bonds in various states and regions.
Long form indemnity agreements offer added protection for the surety company offering the bond. Surety companies use these agreements to protect their rights and manage their risks.
Who Signs an Indemnity Agreement?
An indemnity agreement is signed by an indemnitor, which is why some may call it an indemnitor agreement instead. The indemnitor is another name for the principal and they enter into the indemnity agreement with the surety. An indemnitor is required to pay the surety company back for the bond if the surety bond agreement falls through.
Indemnity agreements protect companies that offer surety bonds from major risks and losses because the indemnitors bear the financial burden of the bond. When the principal party in a bond agreement is an entity, like a business, the owner of that business must sign the agreement as the indemnitor. If the company acting as a principal has multiple owners, they are all usually required to sign the indemnity agreement.
Individuals who take on the role of indemnitor in an indemnity agreement are required to sign the agreement along with their spouse or their next of kin.
Depending on the type of surety company that offers the bond agreement, the signing party requirements might vary. Usually, an owner of a business with at least 10 percent of controlling interest in the company can sign as an indemnitor. This is not a hard and fast rule in every case, however. Sometimes a business will ask for a bond for an owner with only five percent of controlling interest in the company. In this case, another owner may also be required to sign, or an owner with a particularly valuable share in the company might be required to sign.
Terms Related to Indemnity Agreements
There are several terms you need to understand in order to fully understand indemnity agreements. These include:
- Indemnity contract
The indemnitor is the party in a contract that takes on the risk and responsibility of another party, the indemnitee. When referring to surety bonds, the indemnitor purchases the bond for the contractor and takes on the debt to the surety company in place of the contractor.
Indemnity refers to anytime a party receives compensation for their loss or for damages incurred. This term is also used to represent a guarantee of repayment for any losses. A guarantee of indemnity is found in an indemnity contract. This type of contract puts the agreement to repay for losses in writing.
If a policy is written on the basis of indemnification, this means that the insurance company will reimburse the insured person for any claim costs that the individual may have already paid. To indemnify is to compensate an individual or company for any losses, damages, or injuries. Indemnify is the verb form of indemnity.
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