What is a General Agreement of Indemnity and How Does It Work?

6/8/2016 | Construction Blog

For those who work in the world of construction sureties, General Agreements of Indemnity – or GIA’s as they are called – are a normal part of the process. For those unaccustomed to how sureties operate and how they differ from insurance companies, they are as foreign as an unfamiliar language. Here’s a quick primer on GIA’s and how they work.

The first key to understanding General Agreements of Indemnity is to recognize that a surety bond is not insurance. In fact, in many respects it’s nothing like it. Insurance is a premium based system that allows a company to prepay for liability risks in the event someone is hurt on a job or there is property damage. A surety bond is a wholly business transaction by which the surety is extending credit and/or vouching for its principal. To put it in perhaps slightly more simple terms, the surety is agreeing to co-sign for the contractor’s financial viability.

With this in mind, sureties vet the companies to whom they issue bonds carefully. In essence, they want to know whether that principal has the wherewithal, financially and otherwise, to complete the project which is being bonded. Once they are satisfied that they can “vouch” for the principal/contractor they will typically issue the bond. Before doing so, the sureties typically ask the principal for something too though.

Sureties are risk averse by definition; so in addition to taking premium for the bond they seek assurances from the principal/contractor that there will not be any problems. These promises become the GIA. These legally binding and enforceable agreements are typically a pre-requisite to the bond being issued and contain a number of clauses favorable to the surety. Typical GIA’s include an obligation of the contractor and its owners to indemnify the surety for any losses paid by the surety, the right to demand the deposit of collateral, and the right to examine and audit the contractor’s books. These remedies are by design serious in order to be sure the surety is protected from losses and are called upon by the surety as soon as a claim is made against the bond.

When placed in context, General Indemnity Agreements are much easier to understand. They are, however, serious business with serious consequences. Construction companies and sureties alike should be thoughtful in crafting them as a result.