Secrets of Bonding 79: Personal Indemnity, How to Avoid It

If there is one universal complaint we hear from Performance Bond applicants it is their reluctance to give personal indemnity. And there is even more resistance from their spouses! Keep in mind, people operate through corporations to protect their personal assets. So why defeat the purpose by signing personally? Why do bonding companies require this and can it be avoided?

The giving a personal indemnity makes the company owners and spouses liable in the event of a bond claim or loss. It means assets such as their home and investments are literally at risk if there is a problem on a bonded contract. People typically view bonds the same as insurance where there is no such personal obligation. Therefore there’s a natural resistance to this bonding requirement.

Let’s stop for a moment and understand why such indemnity is expected. A bonding relationship is much like borrowing money from a bank. Unlike insurance, neither the bank nor the bonding company ever expects to have a loss. When you apply for a bank line the lender may ask for personal signatures of the company owners (co-signers) to support the credit application. This means that if the company fails to pay the debt, the bank may seek recovery from the co-signers. The bank wants the owners to stand behind the company obligation.

The same approach is used in bonding. Bonding companies want the company owners to share in the risk and understand the importance of preventing losses. Personal indemnity accomplishes this.

Why must spouses sign?

Three reasons: 
1. Company stock is normally a jointly owned marital asset. 
2. The success of the bonded contracts benefits both parties even if they are not both active in the company. 
3. Bonding companies want to prevent assets from being moved around to avoid the indemnity obligations.

For these reasons “full personal indemnity” is generally required by all bonding companies. However there are some exceptions. How do some company owners avoid this requirement?

• A long relationship with the surety. It is possible that after many years in a profitable relationship, the contractor may convince the surety to make an exception. 
• The company’s size or nature. Firms with a multi-million dollar net worth may be viewed as so credit worthy, the additional support is unnecessary. 
• Public Companies. Publicly owned companies and ESOPs normally only give company indemnity. In both cases obtaining personal indemnity is impractical. If the underwriters want the account they know full indemnity is not in the cards. 
• Pre-Nup. The existence of a Prenuptial Agreement or Non-transfer of Assets Agreement between married parties/stockholders could justify waiving the spouse. However, the stockholder would still give indemnity.

These examples are real life solutions. However for many contractors they are simply not within reach. The simple truth is that in most cases the requirement cannot be avoided.

No company owners/spouses like to give personal indemnity, but virtually all must do so if they wish to have bonded contracts.

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