Suretyship: A Primer On Common Indemnity Agreement Provisions

Any contractor seeking bonding capacity, whether it be for public or private projects, will necessarily see a general indemnity agreement as a part of establishing a relationship with any surety. As you may know, sureties are generally to be held harmless with multiple common law rights at their disposal for indemnification against a nonperforming principal. Indemnity agreements further expand upon the surety’s common law rights and are standard across the surety industry. While the indemnity agreements are generally non-negotiable for contractors, it is imperative to be familiar with their terms. Although not intending to be all encompassing, the following is a brief analysis of some of the common indemnity provisions a contractor, and other indemnitors, should be familiar with. These provisions were selected in particular due to their significance and frequency in indemnity agreements.

Indemnification. When there is an express contract for indemnity, the rights of the surety are to be determined by the letter of the contract for indemnity. The primary purpose of the indemnity agreement is to spell out the surety’s rights to indemnification and to be held harmless, and any discussion of the indemnity agreement without addressing the indemnification provision would be amiss. Typically, the indemnitors agree to compensate the surety for any loss sustained or for any liability which the surety incur. The specific language of the indemnity agreement governs whether the surety is entitled to indemnification for liability, actual loss, damage, or a combination of these. More common than not, the surety’s indemnification provision will provide rights to indemnity for both liability and actual loss. Without an indemnity agreement, and without this provision, the surety’s right to reimbursement arises under common law or statutory law. Such rights to recovery are generally limited to the surety’s payments under its bonds–not nearly as encompassing as the indemnity agreement’s indemnification provision or the definition of “loss” in most indemnity agreements.

Collateralization. Most, if not all, contract surety indemnity agreements contain certain clauses for collateralization. Generally, these provisions provide that if at any time, the surety is threatened with liability, receives a claim against a bond, or believes it may incur liability, the indemnitors will immediately, upon demand, pay the surety an amount which the surety deems necessary to protect itself from loss. As a general rule, these provisions also include, or are paired with, a specific performance provision which stipulates the indemnitors’ failure or refusal to comply with a demand for collateralization irreparably harms a surety. Similarly to the indemnity provisions, collateralization provisions are also generally enforced across the country and are frequently the basis for preliminary injunctions against unobliging indemnitors.

Books and records. Most indemnity agreements also entitle the surety to access to the indemnitors’ books and records. As with collateralization, the majority of courts across the country likewise routinely provide sureties with injunctive relief in the form of specific performance to review the books and records of its indemnitors.

Prima facie clause. The prima facie evidence clause is arguably one of the surety’s most powerful provisions in an indemnity agreement. Designed to facilitate the surety’s prompt recovery of losses, this clause permits the surety to present verified payment vouchers or other documentation as prima facie evidence of both the existence and amount of the indemnitors’ liability. Together with other provisions in the indemnity agreement, such as the right-to-settle clause, the prima facie clause shifts the initial burden of proof to the indemnitors, requiring them to demonstrate that the surety’s payments were made fraudulently. Typically, prima facie clauses state that affidavits or other evidence of payment by the surety are prima facie evidence of the indemnitors’ liability or the surety’s right to recover those losses. This often includes attorneys’ fees as a “Loss.”

Power of attorney. Most indemnity agreements grant sureties broad-ranging power-of-attorney rights over the affairs of principals and, depending on the specific language of the agreement, indemnitors. The provision is most often used by sureties to settle the claims brought against it and, in some instances, claims brought by the principal. While sureties can be reluctant to exercise their power of attorney rights, they are generally enforceable and something a principal should be aware of. As with the other rights identified above, the relationship between principal and surety is governed by the terms of the indemnity agreement and applicable state law.

Conclusion. Contractors seeking to perform bonded work will aways be faced with an indemnity agreement as a pre-requisite to obtaining bonding capacity. As long as the contractor performs its bonded contracts accordingly, there should be little concern. Nevertheless, the power of the indemnity agreement should not be ignored, and every contractor should understand the obligations which it owes to its surety under the same if, or when, a claim is made. Hopefully, this paper has provided the reader with general knowledge of the basics of some common indemnity agreement provisions. Of course, if you have any questions, please do not hesitate to contact the Clark Hill construction team for assistance.