There are times when a client needs to obtain a bond and is unable to do so. In cases like these, a third party could be willing to guarantee the bond. This would require the third party to execute an Indemnity agreement with the surety in addition to the bond principal, the party named on the bond.
There are a number of situations where an additional Indemnitor is required:
•Matters that have insurance coverage requiring the insurer to obtain the bond on behalf of their insured.
•A parent organization or a higher-tier entity elects to guarantee the bond to obtain more favorable terms for their subsidiary.
•A company is in the advanced stages of acquiring another entity and they elect to be an additional Indemnitor on the entity’s bonds.
•An investor is willing to indemnify the surety for the bond.
•Someone with a vested interest is willing to indemnify the surety for the bond.
In these situations, clients generally want to know whether or not the third party is also going to be listed on the bond and how this works. The third party (the additional Indemnitor) would not be listed on the bond or in the pending action. The third party would be required to provide financial information to the surety, which would allow them to underwrite the bond based on their financial resources, not just the bond principal’s financial means. The third party would be required to execute an Indemnity agreement with the surety, which is the contract for the bond. The Indemnity agreement is between the surety, the bond principal, and the additional Indemnitor. This is not disclosed in the bond itself or to the Court.
One of the reasons why a third party may want to guarantee the bond is that they are looking to improve or strengthen the Indemnity package submitted to the surety. This would allow the surety to offer more attractive terms for the bond, and could mean a smaller percentage of collateral, or waiving the collateral requirement all together. This could also mean that the surety will reduce the amount of the premium they are charging.
Another reason could be that they are contractually obligated to indemnify the surety on the bond. There are situations involving insurance coverage which require the insurer to indemnify the surety for the bond on behalf of the bond principal (the insurer’s insured).
If the bond principal is unable to execute the Indemnity agreement in addition to the insurer, the surety would require the insurer to execute an inducement letter which ties them to the case. A lot of clients are hesitant to be added to a lawsuit. Instead, they would provide their indemnity through an Indemnity agreement rather than being a named party. This allows them to guarantee the bond without taking on the additional liability of being named to the suit itself.