J. Indemnity Agreements

• Library: SC Construction Law Desk Book (SCBar) (2013 Ed.)

J. Indemnity Agreements

Before a surety issues a bond, it typically will conduct an underwriting analysis to evaluate the principals' capacity to perform the bonded work and its ability to indemnify and exonerate the surety against losses sustained by the surety as a result of issuing a bond. In addition to common law and statutory rights afforded to the surety, the surety frequently will ask the principal and other named indemnitors (who can include the principal's members or shareholders, an indemnitor's spouse, etc.) to sign an indemnity agreement, under which the principal agrees to indemnify the surety, to assist in the handling of claims, and to provide security interests in the principals' equipment, machinery and receivables. The indemnity agreement also typically provides the surety the right to pay or otherwise settle claims on the bond.

The terms of a surety's general agreement of indemnity will vary from surety to surety and should be examined for specific rights and remedies afforded therein. Indemnity agreements frequently include provisions for recovery of the surety's attorney's fees, costs, and expenses related to the surety's investigation, review, and resolution of claims under the bond. One purpose of the indemnity agreement is to reduce the risk to the surety.

South Carolina law recognizes two types of indemnity: contractual indemnity and equitable indemnity.¹⁶⁶ Contractual indemnity involves a transfer of risk for consideration, and the contract itself establishes the relationship between the parties. In the context of a surety, the contractual indemnification is established by virtue of the general agreement of indemnity between the surety and the indemnitors. The purpose of indemnity is to hold another harmless from a loss that he has incurred or is about to incur. Indemnity, unlike insurance, is not a promise to pay for the debt of another. A surety can be held directly liable for the debt of its principal, but an...