Do Not Ignore the Surety’s Demand for Collateral Security

If you are furnishing a payment bond or performance bond to an owner or contractor (the obligee), whatever the case may be, then you are the principal of that bond.  Sureties, however, are not issuing bonds on your behalf out of the kindness of their hearts.  It is a business and they are issuing the bonds with a risk-free mentality, unlike liability insurance.

When a surety issues a bond on your behalf, you are executing an agreement of indemnity with the surety.  It is personally guaranteed by principals (and their significant others) and potentially affiliated entities.  This is a powerful document and gives the surety stern options and rights in the event they perceive a risk.  One of those stern options is to demand that you, as the bond principal, furnish the surety with collateral security.

Furnishing the surety with collateral is oftentimes resisted since the  principal may not have the collateral demanded or the collateral may be perceived as unreasonable.   But, by resisting, the principal puts itself in a lose-lose position.  And, I mean a lose-lose position.  The principal can no longer argue the surety acted in bad faith if it refused a demand for collateral security.  Review this article for more information on this issue dealing with a subcontractor that refused to post collateral security upon demand from its performance bond surety.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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