The Benefits and Risks of Third Party Indemnity

Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.

“Risk” and “Assurance” yellow street signs pointing opposite directions. “Risk” sign has a red line through it.

For a contractor that is wanting to bid a job, or has won a job that requires a bond they are not able to qualify for on their own, one option to increase their bond capacity and ability to qualify would be to have a third party indemnify to their surety. While there are definite risks, this type of agreement can be very beneficial to both parties.   

For the contractor, the main benefit is the additional financial backing provided by the third party that will help alleviate concerns of a surety that might lead to the contractor running out of money, therefore, not being able to complete the job as contracted. For the third party, they can negotiate what their compensation will be through the contractor, since they are taking on a financial risk by signing the indemnity agreement. This type of agreement should not be entered into lightly because there are risks for both the contractor and the third party.

A Surety Bond Indemnity Agreement is a signed agreement which states the principal will indemnify the surety company, should a claim occur. When a third party also signs this agreement, they are opening themselves up to the risk of having to indemnify the surety should the contractor that is doing the work fail to complete it, forcing the surety to step in to complete the job. This becomes even more likely if the contractor becomes insolvent, making the third party next in line for indemnity purposes. While there is risk associated with this type of agreement, there are ways to mitigate that risk and that is for both the contractor and the prospective third party to thoroughly review each other’s businesses.   

When a third party is providing indemnity to support another businesses project, it is vitally important that they have a firm grasp of that company’s current capacity, capital and character, and this is the same for the contractor. The contractor needs to know that if they do get into trouble on the job, the third party does in fact have the ability to help them out of the situation.

For any questions regarding third party indemnity, please contact Rancho Mesa Insurance Services at (619) 937-0164.