Joe Catania, President of Anderson & Catania Surety Services, explains the importance of the general indemnity agreement in securing bonding.
What Is Meant by Stating That Surety Credit Is Unsecured Credit While Banking Is Secured Credit?
The surety credit relationship is unsecured credit. The General Indemnity Agreement (GIA) is the only document that ties the principal, corporately and individually, to the surety company if a default or a claim occurs on a particular project. This is unlike banking, which is secured credit and a specific UCC filing is done at the closing of a loan.
In Which Situations Would a Surety Company Need to Perfect a Security Interest on My Assets?
Sureties will commonly perfect a security interest when a contractor defaults or is not executing the contract according to specifications. This scenario could result in a performance bond claim. The surety may have to finance the non-performing contractor or re-bid the contract to a completion contractor. The surety will then file its security interest using the General Indemnity Agreement (GIA). Another scenario is when the contractor has claims from subcontractors and suppliers for non-payment. This scenario could result in a payment bond claim. The surety company would do its due diligence to determine whether the subcontractor and supplier claims are valid. If the surety has to pay out on the claims, then the surety will act to perfect their security interest by filing the GIA.
Do Banks Underwrite Bonded Project Account Receivables Different from Unbonded Project Account Receivables?
Yes, they do. Surety companies have the first lien on bonded project receivables, which should be held in a trust account if a project will need to be completed or financed by a surety company. This is unlike unbonded project receivables where the bank would have a first lien on receivables.
Surety is like banking; it’s credit. However, in the surety marketplace, there are unsecured creditors. So, for each customer or client, you have to sign a general indemnity agreement, which guarantees that you’ll back your company.
So, you have the corporate signature and also the personal signature and, if you’re married, your spouse. The personal signature ties you in, behind the company. That says a lot for the surety company to support you; that you’re behind your company and have your personal signatures also.