Before a surety bond (payment or performance bond) is issued to a contractor, the surety will require that the contractor execute a General Agreement of Indemnity (“Indemnity Agreement”). This Indemnity Agreement will be guaranteed by personal and other corporate guarantors in order to reduce, and ideally eliminate, any exposure and risk to the surety in the event claims are made against the bond. In other words, if there is a claim, the surety wants to know that there are personal and corporate guarantors that remain liable for indemnifying the surety for the surety’s costs in the event the bond principal breaches the Indemnity Agreement.
As a contractor, it is important to know what your rights are in the Indemnity Agreement as well as the rights of the surety. Keep in mind that the Indemnity Agreement is intended to benefit the surety by reducing its exposure and risk in consideration of writing a surety bond. Thus, there will be strong provisions favoring the surety. One such provision will provide that the principal will assign certain collateral to the surety if the principal defaults under the Indemnity Agreement. This is known as a collateral assignment provision. This includes a collateral assignment of the bond principal’s rights under contracts (inclusive of receivables under those contracts). For example, if the principal defaults under the Indemnity Agreement, the surety can argue that as a result of the default, all contracts, claims, and receivables under those contracts were collaterally assigned to it per the Indemnity Agreement.
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