Renegotiating Your Indemnity Agreement
When was the last time your broker suggested that your construction company should re-negotiate your GIA (General Indemnity Agreement)? More than likely, it has probably been never, or at the very least a long time. Since your broker is more interested in the surety company that pays their commissions, they probably won’t feel comfortable asking them to hand back personal and corporate assets that may no longer need to be under their control. If you’re in a position where you can or need to negotiate your indemnity agreement, check out these tips on what you can do to start the process.
Renegotiated Indemnity Agreement
To begin, let’s make sure we understand what an indemnity agreement is. An indemnity is a contractual agreement between two parties, where one party agrees to pay for potential losses or damages caused by another party. In surety, indemnification is the process of bringing the surety company back to where they started financially. So for example, if a surety pays out $20,000 for a bond claim, the principal indemnifies the surety by repaying them $20,000.
Most contractors starting out need to pledge all their personal and corporate assets to obtain their first bond. As your company grows, so does your reputation for completing projects on time and budget. Obviously, your financial assets are always a consideration in maintaining and increasing your surety line of credit, but so is your track record of project completions.
It is important to remember a surety bond is a financial institution. If you request your surety to execute a bond on behalf of your company and you default on a project, you will most likely be facing some repercussions.
A surety bond is not exactly an insurance product; however, surety claims are handled very much like those of various general and automobile liability claims. As long as the principal performs to the contract’s specifications and pays all subcontractors and suppliers, then there should not be any problems.
However, if the bonding company establishes a ‘reserve’, or required payment, then you may be considered in ‘default’ which means that a claim has been made against the contractor with the individual surety. This will happen if you do not provide the bonding company collateral to a potential claim or expected loss. Even if you’re not actively putting yourself in this situation, if the bonding company spends money on your behalf, then you are required to compensate them.
Working with Your Surety
As you can see, if you don’t have a thorough indemnity agreement, then a lot of financial situations can stack against you that are out of your control. If you’re still working to establish good standing within the construction industry, then it may be time for you to do some financial risk management and free up some assets that are otherwise held captive in your GIA.
You have several options to pursue if you want to obtain a less restricted indemnity agreement. Your first option is to approach your surety and see what they are willing to do with your request. If you are not satisfied with that outcome you may want to consider option two, which is a Back – Up Surety Bond Program. This allows you to establish a new GIA that is more flexible with your current financial situation and growth of your company.
This way, you have more control over your agreement and know what to expect when it comes to your financial risk. It is said that those who fail to plan, plan to fail. By ensuring a solid GIA, you’re protecting the future of your company.