When applying for a Surety Bond, you might be asked to sign one or more indemnity agreements. If the surety company is requiring signed indemnity, they will need your signature, as the business owner, and the signatures of any other owners.
What may come as a surprise is spousal indemnity is also a surety requirement.
But, if your spouse has nothing to do with your business, why is the surety requesting his or her information and signature to receive the bond?
Let’s begin with outlining the purpose of the bond.
A common misconception about Surety Bonds is the policy serves to protect you, the business owner. However, this is not the case as the bond does not serve the same purpose as traditional insurance policies.
Think of this type of policy as a mixture of a line-of-credit and insurance.
The Surety Bond you are securing is a three-party contact between the principal, obligee and surety.
The Principal – You, the business owner, fill this role.
The Obligee – The entity requiring you to secure the bond. Typically, this is a state or federal department.
The Surety – The company that issues your bond.
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If you, as the principal of the bond, perform your duties unethically or fail to fulfill your obligations, a claim can be made against your bond.
The surety company will perform an investigation to determine the validity of the claim. A payout of up to the full bond amount is made on claims found to be valid. As principal of the bond, repaying the surety back in full is your responsibility.
The surety is taking on a great deal of risk when issuing a Surety Bond. Having the principal sign an indemnity agreement is standard practice for surety companies to transfer that risk to the principal.
The language in the indemnity agreement will vary between surety companies, but you’ll find the terms are mostly the same.
If a payout on a valid claim needs to be made, the surety will pay the cost of the claim with the expectation the principal will reimburse them in full.
The purpose of the indemnity agreement is to ensure the surety company receives its reimbursement from the principal.
The three types of indemnity agreements are corporate, personal and spousal.
Corporate Indemnity – The principal signs on behalf of the company.
Personal Indemnity – The principal and all other business owners (with 10%+ ownership of the company) must sign a personal indemnity agreement.
Spousal Indemnity – Additionally, the principal and business owners’ spouses must sign indemnity agreements.
Prior to receiving your bond, the surety must collect individual signatures from all business owners with 10% or more ownership in the business. These signatures are in addition to the indemnity agreement signature for the company as a whole.
Business owners who are married must also have their spouse sign an indemnity agreement.
This requirement is sometimes met with resistance from the principal.
If your spouse doesn’t have any involvement with the business, why does he or she need to sign an indemnity agreement for you to receive your bond?
Simply put, the surety requires your spouse’s indemnity signature to ensure you don’t move assets over to him or her if they have to collect from you due to a payout on a claim.
There is a large amount of risk attached to the bond. So, by not willing to provide an indemnity agreement signed by your spouse, the surety will likely not approve the bond request.
No spousal indemnity agreement = No Surety Bond quote
The surety performs a thorough investigation on any claims made against the bond. Any valid claims result in a payout from the surety up to the whole bond amount.
As the principal, it is your duty to make the surety financially whole, again. This responsibility falls on everyone who signed an indemnity agreement for the bond.
No, an indemnity agreement is not always required to purchase a bond. This requirement typically depends on the amount of risk associated with the policy.
If the bond amount is relatively small and/or there is little chance of a claim, the surety may issue the bond instantly without a credit check. An instant issue bond that doesn’t require underwriting will not need an indemnity agreement.
When a spousal indemnity signature is required to get your Surety Bond, there isn’t another option to get the bond. However, you might be able to get a Letter of Credit in lieu of your Surety Bond requirement.
Most lending institutions issue Letter of Credits, but require 100% cash collateral. Choosing this option means you miss out on the benefit the Surety Bond provides of not having your funds tied up in an account you can’t access.
There is no getting around submitting the signed spousal indemnity agreement to secure your Surety Bond.
Your spouse may not have anything to do with your company, but it’s all too easy to move assets and funds to your spouse to avoid reimbursing the surety for a claim payout.
The surety is taking on a great deal of risk when issuing a bond. Requiring signed indemnity agreements transfers this risk over to you, the principal.
This agreement grants you the ability to buy your Surety Bond, so you don’t have to front 100% of the necessary funds as collateral.
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Beau is the Marketing Content Developer at Surety Solutions, A Gallagher Company. He creates content about all types of surety bonds, including mortgage, court, lost title, contractor, fidelity, ERISA and many more.
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