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A General Indemnity Agreement (GIA) is a legal document that outlines the Surety/client relationship. As a contractor, it is important to understand the terms and language found in this document. Here’s a quick reference regarding some of the significant terms you may encounter:
Bonded Contract – a contract that the Surety issues a bond.
Default – considered to be a time where the principal or indemnitor(s) fails to pay a bond premium, forfeits a bonded contract, fails to pay subcontractors for labor and materials needed for the bonded contract, fails to abide by the GIA, files for bankruptcy, and generally does anything that impedes the rights and well-being of the Surety.
Loss – any kind of liability, fee, charge, cost or expense that the Surety incurs because of a bond they issued. Losses include money posted by the Surety as a reserve for potential losses, all costs resulting from investigating, paying or litigating any claim or enforcing the GIA. This includes legal fees, professional and consulting fees, and witness fees.
A loss can also be an unpaid premium and unpaid loans by the principal to the Surety. Essentially, if the contractor is in a situation where they owe the Surety money or can cause the Surety to owe someone else money, that is a loss.
Indemnity – states that the indemnitors agree to indemnify the Surety and not hold them legally responsible for any loss incurred because of requests to execute bonds, failure by indemnitors to comply with the conditions of the GIA, or in the enforcing of the GIA.
Posting of Collateral – Indemnitors may have to post collateral for the bond principal. Indemnitors agree to immediately post collateral at the demand of the Surety in the following amount: the amount of reserve established by the Surety for the singular purpose of covering losses or the amount of loss or potential loss, including legal expenses, in relation to claims or other liabilities. The Surety can use any or all of the collateral at its own discretion for the purpose of settling or paying a claim.
Claims – the Surety has the exclusive right to determine which claims, liabilities or suits they pay. That decision is final and binding. Sureties make the decision of what claims to pay out without the consent of the principal or indemnitors.
The Surety is entitled to indemnity for any and all payments it makes in good faith. If indemnitors and principals want to litigate a claim, they must post collateral with the Surety that includes all costs and legal fees.
Surety’s Right to Decline Bonds – even though GIAs are used to obtain bonds, this clause gives Sureties the right to refuse to write bonds. If the Surety decides to decline the request for a bond issuance, that does not release the indemnitors from the GIA for any outstanding bonds or bonds to be issued in the future.
Since GIAs are a required component of obtaining surety bonds, your construction company will most likely come across them. Educate yourself on GIAs so your business is not at risk. Still have questions about how General Indemnity Agreements can affect your coverages? Call TSIB today at 201-267-7500!