Why Are Personal Guarantees Required for Surety Bonds?
Joe Catania, President of Anderson & Catania Surety Services, discusses the reason why owners of construction or contractor companies must sign a personal guarantee with a surety company.
What does it mean to offer a personal guarantee to a surety company?
The owners of the company sign with a personal guarantee, so in addition to corporate assets, individual assets are part of the surety indemnity agreement. Sureties are unsecured creditors and only have the General Indemnity Agreement to file for security if situations arise, such as a contractor default or a payment bond claim.
What are the different ways that contractors can limit personal indemnity?
Depending on the credit analysis and if the contractor qualifies for anything less than full personal, the different ways are the following:
· Homestead exclusion
· Limited personal on a net worth basis
· Waiver of certain assets
· If there is a spouse, waiver of spousal indemnity for reasons such as a separate business and/or a separate tax return filing
What is a homestead exclusion?
The owner’s residence is waived and is not part of the indemnity package. In certain states, there are laws that exclude homesteads in certain litigious situations.
Personal indemnity is a standard condition for new and long-term clients. The surety company wants to see the principal owners stand behind the company with a personal guarantee. This also puts you and the surety company on equal footing with their banking relationship, as the contractor for their line of credit, has to sign personally also.
So, with that said, as the surety relationship grows, the program grows, as well as their balance sheet, there could be a possibility down the road to get this waived.