General Indemnity Agreements: An In-Depth Guide

General Indemnity Agreements Explained

General Indemnity Agreement (GIA) is a legally binding contract that has been modified for use in the surety world. The parties to the GIA are known as the indemnitee and indemnitor where the indemnitor is the surety. Consequently, the indemnitor (surety) receives a total indemnity from the indemnitee (principal) including the right to demand collateral upon default.
The purpose of the GIA is for the surety to be able to shift the risk of loss to the principal on any and all bonds that the indemnitor or other indemnitors and/or indemnities may have with the surety. The risk is shifted when the principal signs the Indemnity as a "principal" regardless of whether the surety issues a new bond or not, and can be imposed even if it is not actually paid by the principal . In other words, the risk shifting does not depend on payment and is practically unavoidable.
General Indemnity Agreements give the surety many powers and rights. Those powers include the ability to demand pro rata contribution from other indemnitors whether or not they were named on the bond, the authority to settle with a claimant even where such settlement exceeds the underlying whole dollar amount of the bond, and the ability to revoke consent to settle from indemnities who settle without the surety’s consent.
General Indemnity Agreements also allow the surety to obtain all kinds of information concerning finances and projects and the ability to incur attorneys’ fees. General Indemnity Agreements are sometimes also amended to include additional persons or entities as indemnitors, and are sometimes amended as part of a litigation settlement.

Essential Elements of Indemnity Agreements

While the specifics of a general indemnity agreement will vary depending on the particular business and the needs of the parties, a number of common components are found in most agreements. These components include indemnity clauses, liability limits and exclusions, as well as other special provisions […]. Indemnity Clauses. Generally, the core of an indemnity agreement is the clause that sets out the obligation to indemnify. These clauses say who is responsible for what, and as such, the language must be carefully drafted to avoid uncertainty and liabilities that were not intended. It is important for any party considering an indemnity agreement to seek legal counsel, given the potential risks involved with unclear language in these agreements.
Liability Limits and Exclusions. As mentioned above, a well-drafted indemnity agreement will always have some limits and exclusions. There is virtually no way to completely eliminate the risk that there will be indemnity obligations later on. Nevertheless, liability limits and exclusions can establish sets of risks that each party can live with. Some indemnity agreements will exclude certain types of damage from indemnity obligations altogether. These exclusions focus on monetary damages or losses that might not be completely linked to the defaulting party. For example, even if an indemnitor agrees to indemnify the indemnitee for actual damages from a breach, the indemnitor may not have to cover consequential, incidental, indirect or resulting damages.

Operation of a General Indemnity Agreement

General Indemnity Agreements ("GIAs") are governed by Section 3(4) of the federal Miller Act, which defines "performance and payment bond" as: "any performance and payment bond, as defined in section 3131 of title 40." In turn, Section 3131 defines "performance and payment bond" as: "a written instrument executed by a person (commonly referred to as a "contractor") to secure (1) the performance of a Federal Government construction contract; or (2) the payment of labor and materials required for performance of the contract." Simply stated, Section 3131 requires that every contractor performing on a federal construction project provide a bond to guarantee its performance and payment obligations. A typical GIA is issued in conjunction with the performance and payment bond. It names the surety (the "indemnifier"), the contractor (the "indemnitee"), and the federal project owner (the "obligee"). The primary purpose of a GIA is to allow the surety to pursue indemnity against the contractor in the event that the bond is exhausted by payment of claims against it. Under the terms of a typical GIA, the indemnitor and the indemnitee agree, if the surety pays claims against the bond pursuant to an obligation owed to the bond’s obligee, then, to the extent of the payment made by the surety, the contractor will indemnify the surety for such payments, together with associated expenses and fees, including attorney’s fees. Further, the indemnitor agrees, without prior notice to the surety, to cause all sub-subcontractors on the bonded project to execute similar agreements in return for their receipt of any proceeds from the bonded project, and also agrees to fully cooperate with the surety in its efforts to recover from such subcontractors. The scope of the repayment obligation is typically unlimited. It is common for the surety to agree to pay between 100% and 200% of the contractor’s liability under the bond, although amounts as low as 50% and as high as 300% are not unheard of. The amount of reimbursement to be repaid is usually calculated as to confirm to the principal amount of the bond. For example, Section 5 of the AIA A312 form of performance and payment bond provides that each bond remains in full force and effect until the work of the bonded contractor is completed and accepted by the federal project owner. The parties customarily aim to have the terms of the GIA apply through the expiration of the payment bond. In the absence of express language limiting or capping the terms of reimbursement, GIAs in the industry tend to be unlimited in scope. The contractor (or indemnitee) must generally agree to indemnify the surety for (1) any payment bond liability pursuant to the United States Miller Act or comparable state law; (2) all court costs and expenses, including indirect, consequential, or punitive damages; (3) reasonable attorney’s fees; and (4) other legal costs, including all fees or expenses incurred by the surety in resolving claims within policy limits. Some GIAs, however, expressly exclude the recovery of attorneys’ fees and costs within policy limits for anything other than defense costs. To the extent that accelerated indemnity has been awarded by courts, the amount of accelerated indemnity is generally limited to the unpaid balance of the contract (minus actual attorneys’ fees, costs, and expenses). In addition, a typical GIA includes a broad statement whereby the surety is authorized to pursue any remedy provided under law or at equity, notwithstanding any election by the surety to pursue any specific remedy. It is common for the surety to maintain the right of subrogation, to the extent permitted by applicable law, against the contractor, its agents, employees, and sub‐subcontractors. The obligations created by a GIA are independent obligations, meaning that the surety can enforce the indemnitee’s obligations regardless of whether the surety has performed any work, whether there is any setoff or counterclaim, and whether the surety is in default of its duties to the contractor/subcontractor. Thus, the surety’s rights under the agreement can be enforced without regard to the relationship of the parties under the bond. The surety’s rights under the GIA often survive termination of the GIA. The surety’s rights under the GIA typically fall under the general statute of limitations as applied in the forum of suit.

Advantages of General Indemnity Agreements

Benefits of a general indemnity agreement for creditors and sureties include the following:
Risk management and mitigation – The principal business purpose of the general indemnity agreement is to allocate the risk of loss or default to the later financing stage. The indemnity obligation also serves as an additional layer of risk to the underwriting and approval of future financing, as well as creating a significant incentive for the customer to make payments.
Protection before default – A well-drafted general indemnity agreement should provide the loyalty and protection that creditors want for their contracts, and definitely prior to a default. Once a default has occurred, creditors do not necessarily have the "freedom" to unilaterally recycle the same indemnity and corporate guarantee. Therefore, the right to reconsider credit decisions is critical to the goals of the general indemnity agreement.
Control of competing interests – The general indemnity agreement gives a potential creditor more control over the participation of a potential surety. In the absence of a properly negotiated general indemnity agreement, a surety often claims its own rights of preference in priority and/or setoffs against the creditor’s performance securities.
Priority over liens – The general indemnity agreement gives the potential creditor the right to collateralize the indemnity with a global lien on all of the current and future assets of the indemnitor, subject only to existing senior liens (which are often deemed acceptable under the general indemnity agreement) and certain other limited exceptions.
Liability expediting – Because of the prior commitment to and acceptance of the general indemnity agreement, litigation over the indemnity and corporate guarantee should be far more limited or expedited than the normal indemnity litigation system.

Typical Situations for Indemnity Agreements

Although indemnity agreements are commonly understood in a variety of legal contexts, they have become particularly popular in connection with comprehensive general liability (CGL) insurance policies. Most large corporations require their suppliers to purchase CGL coverage or purchase their own CGL policies with an additional insured endorsement in order to get paid. The need for CGL coverage is especially prevalent in the construction industry. That is why an indemnity agreement to share liability among parties is most commonly found in the construction industry. Such indemnity agreements rarely appear between government entities because public contracts typically disclose an acceptance of predetermined risk (i.e., no indemnification).
However, general indemnity agreements commonly appear in virtually all industries that do business with recognized brands or retailers. This could be the beverage industry or it could be food service. If a hot dog or a soda is packaged improperly, the consequences are great and dollars are lost from multiple sources. Another example is in the hospitality industry where hotels contract with national hotel brands. A hotel with a general contract with a brand or franchise will invariably have indemnity provisions in its local contracts with service providers and subcontractors. The same is true between an aircraft manufacturer and its suppliers. If a component fails, the repercussions are felt on both fronts.

Common Issues and Constraints

From a potential risk management perspective, a general indemnity agreement (the "Agreement") might appear to provide the ideal solution to address the risk of personal liability. However, this might not be the case; there are potential challenges and limitations associated with general indemnity agreements that should be reviewed before entering into an agreement.
In broad terms, the scope of the indemnification may be limited by the enabling statute, any reviving or initial statute, a limitation of liability statute or other limitations imposed by common law. For example, in some circumstances, indemnification may be prohibited as against public policy.
There could be enforcement issues resulting from violation of the procedural requirements for enforcement of an indemnity provision found in either The Business Corporations Act (Ontario) RSO 1990, c. 38 (the "OBCA") or The Canada Business Corporations Act RSC 1970, c. 16, c . 2. According to s. 126 of the OBCA, the particulars of the Agreement require approval of directors or shareholders in certain circumstances. Also, the Articles integrating a provision for indemnification is prima facie evidence of compliance with s. 126 and the incumbent person is entitled to indemnity from the company. If the Articles do not provide prima facie evidence of the Board or shareholder approval, the particulars and compliance with the Articles may be relevant to enforcement disputes.
The limitation period may offer an additional basis for avoiding enforcement. For example, s. 50 of the Limitations Act, 2002, SO 2002, c. 24 provides that a proceeding shall not be commenced after the earlier of: (a) the expiry of the relevant limitation period, or (b) the expiry of the 15 year long stop period. Additionally, there are other procedural and substantive challenges which may be relevant to enforcement of an indemnity provision.

Best Practices in Indemnity Agreement Drafting

Assuming an indemnity agreement has survived any legal challenges as to its enforceability, the burden is upon the construction manager, contractor, sub-subcontractor or other indemnitor to provide suitable indemnity to the indemnified party. All indemnity agreements should clearly identify the scope of indemnification. The scope of scope may be limited to protection against liabilities arising out of the work of the indemnitor or its subcontractors, or it may encompass liability exposure arising out of the acts, omissions and negligence of the indemnified party as well. Encompassing this latter liability will be beneficial for the indemnitor to the extent that it can obtain insurance for both its own work, as well as the work performed by the indemnified party. Similarly, any indemnity for bodily injury should clearly delineate whether that includes emotional distress.
The indemnity agreement should also identify the applicable standard of culpability which triggers indemnification. If the indemnity only affords indemnification for the negligence of the indemnitor, the indemnified party will not be indemnified for the claims that it creates. On the other hand, if the indemnified party found itself liable to the personal injury claimant because of its negligence, the indemnified party would not be entitled to indemnity for such claims. Such scope will benefit the indemnified party, and is designed to protect the indemnified party when it responds accordingly to claims it reasonably believed were without merit.
Including an exception for liability, or a carve-out, for the indemnified party being found to be solely or actively negligent will also be beneficial to the indemnitor to the extent that it wishes to avoid vicarious liability. This will encourage the indemnitor to conduct its scope of work safely and competently, including complying with obligations of the contract documents and statutory safety obligations.

Legal Implications and Variations Across Jurisdictions

The legal considerations vary depending on the jurisdiction and specific state or country laws. For example, some states impose certain restrictions on indemnity agreements that are contrary to public policy unless they are narrowly tailored. Others speakers have used various frequently litigated and tested indemnity agreements and ensured that there are no variations in interpretation.
Additional consideration is required on international projects, especially where litigation might occur outside of the United States and where multiple jurisdictions are involved. For instance, outside the United States, in some civil law countries, indemnity agreements are prohibited because of their similarity to waivers of liability. In such jurisdictions the performance obligations of the parties are understood to include an obligation to make the other party whole for monetary damages caused by a breach of contract.
Additionally in some systems, civil law systems, indemnity rights are likely to be interpreted very narrowly and any attempt to take advantage of a party will be void (i.e. statutory prohibition contrary to public policy). Several of our lawyers with experience in international construction contracting routinely check the indemnity laws of the country they are working in and consider the issues with applying US indemnity clauses outside the United States. Other jurisdictions in addition to the United States are those of France, Italy and Mexico.

Indemnity Agreements in Practice: Case Studies

To fully appreciate the value of a GIA for a surety, consider the following examples. In a 2013 case, Minnesota Min. & Mfg. Co. v. State Bd. of Workers’ Comp., 838 N.W.2d 122 (Minn. App. 2013), the business Minnesota Mining had spent millions of dollars defending claims brought in the International Trade Commission, alleging infringement of aluminum electrolytic capacitors. In 2000, 2001 and 2002 a total of $24 million in duty, i.e., 12 % of the net invoice amount was (under protest) paid as part of an administrative proceeding. There, the United States claimed violations of the Tariff Act of 1930, for goods imported from Japan, Taiwan, Singapore, Canada, Malaysia, China, Indonesia and Thailand. After a final determination in trade court found no violation as to the capacitors made by MMI — it being determined that no domestic capacity to produce the parts in question existed — MMI sought to recover the overpaid tariffs. The court agreed the tariffs should be refunded. When the government refused to refund the money the tax court suit followed. As is often the case when the government is forced to pay it will assert any defense to payment . In this case the Government attempted to raise the defense of indemnity, alleging that the payments were due to the actions of a second company, not MMI. It even went so far as to assert that settlement offer by the government to settle 28 cases for $8 million was held up because "MMI was not a proper party to a settlement agreement." (MMI at 125) The trial court denied the Government’s affirmative defense and awarded MMI the $24 million it had sought. In another recent case, Candela v. Threshermen’s Mut. Ins. Co., (unpub.) 2014 US Dist. LEXIS 93906, MN. Dist. June 30, 2014, the surety had moved for summary judgment asserting that the general indemnity agreement entitled it to coverage of attorney fees it had incurred in defending the principal under the indemnity agreement. Although Candela claimed he had relied on a waiver when agreeing to accept an extension of the GIA, the indemnitor was permitted to pierce the general release, based on the fact that the GIA granted to the surety the right "…to protect itself and be subrogated to the rights of any person or entity paid by Surety hereunder and any reinsurer of Surety." It was held to be effectively a collateral obligation to the original GIA.