Surety bonds are issued regularly, with the various terms and requirements of the bond put in place. Sometimes collateral can be required either by the client offering such or a surety requiring it. Sometimes attorneys and clients want to know why a surety still requires an Indemnification Agreement and the payment of a bond premium, and possibly the execution of what’s called a Collateral or Deposit Agreement if they are putting up collateral.
The reason is that something needs to govern the transaction, which is what the Indemnity Agreement does. The Indemnity Agreement handles disputes between the client, who is the bond principal, and the surety. It also outlines the surety’s rights and availability under said agreement.
Clients putting up collateral still have to pay a bond premium because surety companies do not work for free.
In most cases, they also require a Collateral Agreement because they need an agreement to govern the receipt, administration, and return of collateral. All of this is in the Collateral Agreement.
I bring up the last part about the Collateral Agreement because recently, I had a case where the parties that put up the collateral, the people that executed the Collateral Agreement, and the funds paid under a bond were in dispute. The surety had documented everything clearly with proper titles, signatures, and dates. Three parties obtained the bond, and the dispute that arose among them was decided and settled according to the agreements in place. What could have turned into several years of litigation and other headaches for the clients, the surety, and the obligee was resolved simply. This is why a surety requires Collateral Agreements for matters in which collateral is posted.
It’s a common question, which is why I thought this blog would be beneficial. If you have any questions about how surety already works or anything regarding bonds or collateral, please, call me. I would be happy to discuss them with you.
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