In the construction and surety world, the ink that matters most is not on the bond form, it is on the indemnity agreement that sits behind it. Owners and public agencies ask for a performance bond to ensure the work gets finished according to contract. Surety companies sell the bond, and they do it on the strength of an indemnity agreement that tells them who will make them whole if they have to step in. That is where the quiet but pivotal choice appears: do you sign a personal indemnity, a corporate indemnity, or both?
Over two decades working with contractors, developers, and specialty trades, I have seen more business fortunes turn on indemnity language than on any single bid. People focus on premiums and program limits, yet the real leverage and real risk live in the fine print of indemnity, especially when a project goes sideways. Understanding the stakes is not just legal hygiene, it is operational strategy.
What a performance bond really guarantees
A performance bond is a three-party instrument. The principal, usually the contractor, promises to complete the project as agreed. The obligee, usually the owner or public agency, expects delivery. The surety stands behind the principal, stepping in if the principal defaults. The surety’s options vary by bond form and local law, but the main tools are consistent: finance the contractor to finish, arrange a takeover with a completion contractor, or tender a replacement contractor to the owner. In any of these paths, the surety spends money.
That money does not fall from the sky, and it is not an swiftbonds insurance payout in the classic sense. Suretyship expects no loss. The indemnity agreement is the mechanism that shifts any loss back to the principal and other indemnitors. If the surety pays to complete your project, it will follow the indemnity agreement to recoup every cost it can justify: completion costs, consultant fees, engineers, legal costs, even internal handling fees where permitted.
I have seen claims where the bond penalty was 2 million dollars and the surety’s ultimate exposure, including delay damages and professional fees, climbed past 3 million. That difference, and often the entire bill, runs straight through indemnity.
The indemnity agreement in plain language
An indemnity agreement in the performance bond context usually contains:
- A promise by the indemnitor to reimburse the surety for all losses and expenses related to the bond. A collateral security clause allowing the surety to demand cash or other security if it believes a loss is likely. A right to settle or handle claims at the surety’s discretion, with the indemnitor bound by those decisions if they are made in good faith. An assignment of contract rights, accounts receivable, equipment, or other assets in the event of default or a declared breach. Books and records access, so the surety can audit financials and job cost records. Attorney’s fees provisions, often on a full indemnity basis.
This is not ornamental legalese. When a job starts hemorrhaging cash or an owner issues a cure notice, a surety can invoke these clauses quickly. I have watched companies wire six-figure collateral in a matter of days to keep their bonding line intact. Refuse to post collateral when demanded under the agreement, and your bonding capacity can disappear overnight.
Personal indemnity, corporate indemnity, or both
Personal indemnity and corporate indemnity are tools for the same job. They tell the surety who is standing behind the obligations. Most bond programs require both, at least until the contractor has substantial net worth or a deep proven track record. The distinction sounds simple: corporate indemnity pledges the company’s assets, while personal indemnity pledges the owners’ personal assets. The consequences ripple through banking, estate planning, and risk appetite.
A corporate indemnity is typically signed by the bonded entity or entities. If your operating company is ABC Builders, LLC, then ABC signs. If you use multiple entities, a surety may request cross-corporate indemnity so that related companies back each other. The surety wants a full picture of the enterprise and recourse to the balance sheet that actually controls cash, equipment, and accounts receivable.
A personal indemnity is signed by individuals, often all owners with significant stakes, sometimes spouses as well, and sometimes key executives who control finances. Spousal signatures are not a bureaucratic flourish. In many states, they reach community property or prevent a later argument that certain assets are outside the indemnity net. If you push back on a spousal signature, be prepared to show clear separations of property and meaningful personal liquidity.
Why sureties ask for personal indemnity
Sureties underwrite character and capacity as much as capital. When they insist on personal indemnity, they are aligning incentives. Personal indemnity tells the surety that the owners will fight to finish a job rather than let the company fold and leave the surety holding the bag. It also gives the surety practical leverage. If the company’s working capital dips below covenant levels, the surety can still rely on the owners’ homes, portfolios, or other liquid assets.
In the small to mid-market, it is rare to obtain a bond line without personal indemnity. I have seen contractors with 20 million in annual revenue and steady profits still signing personal indemnities because retained earnings were thin and backlog was rising. Once a contractor builds a strong balance sheet, multiple good years, and a history of low claims, sureties will entertain reducing or removing personal indemnity. That is a relationship and performance discussion, not a form-letter change.
When corporate indemnity alone can work
Corporate-only indemnity tends to appear in three scenarios:
1) The company has substantial tangible net worth, healthy working capital, and strong cash flow history, with audited financials that a surety trusts.
2) The company is backed by a parent with an investment-grade profile, and the parent issues a parental guaranty or corporate indemnity in lieu of individual owners signing.
3) The contractor operates in a regulated or public company environment where personal indemnity is not practical, and the surety believes the enterprise strength offsets the moral hazard risk.
Even in these cases, the surety may carve out exceptions, asking for limited personal indemnity for certain high-risk projects or for a transition period. In my experience, a contractor that wants to move to corporate-only indemnity needs to prepare a narrative and numbers package: trailing three-year profitability, backlog quality, under-billing and over-billing detail, claims history, and a forecast that shows liquidity through downside scenarios.
Hidden pressure points inside indemnity language
Not all indemnity agreements read the same. I have negotiated clauses that made the difference between survival and bankruptcy when a job went bad. A few pressure points:
- Collateral security triggers. Some agreements allow the surety to demand collateral at its sole discretion if it “believes” loss is likely. Others require an objective event, such as a default notice or lien filing. The practical difference is enormous. Good faith standard. Many agreements bind indemnitors to the surety’s decisions if made in good faith. Narrowing that to “reasonable” or adding objective parameters can limit surprises. Sureties resist this change, but it is worth discussing once your track record supports it. Setoff and assignment. Strong surety forms let them grab contract receivables the moment default looms. Contractors with complex intercompany flows may need carve-outs to keep unrelated entities operational. Books and records access. The broader the access, the more intrusive claim handling can become. Expect this clause to stay broad, but clarify timing and scope to reduce disruption during routine work-in-progress reviews.
If you are a small shop, you may not have leverage to change these terms. As your experience grows, revisit the form. I have seen sureties accept rider language after three claim-free years and audited statements that show discipline.
Cash flow reality during a claim
When a claim hits, personal and corporate indemnity interact with daily cash flow in messy ways. A surety that decides to finance a defaulted project often does it through a funds control arrangement. They pay subcontractors and suppliers directly, require lien waivers before releases, and scrutinize change orders. At the same time, they may demand collateral from the indemnitors to cover anticipated overruns. If the company cannot provide it, the surety looks to the personal indemnitors.
I worked with a specialty contractor that took a 7 million subcontract on a hospital project. Delays compounded, liquidated damages started at 25,000 per day, and the GC issued a cure notice. The surety requested 1.2 million in collateral, citing expected acceleration costs and claims consultant fees. The company had 600,000 in available cash after payroll. The owners posted a home equity line and liquidated a brokerage account to meet the collateral demand. It was a bitter pill, but it kept their bonding line alive and prevented a takeover that would have destroyed the firm’s reputation. Twelve months later, they recovered roughly half the collateral after project closeout, but only because they stayed in the driver’s seat and documented every cost.
That experience is not unusual. Personal indemnity is the bridge when corporate liquidity falls short. Without it, the surety’s options narrow, and so do yours.
Banking covenants and the indemnity echo
Your bank reads indemnity risk even if you never send them the agreement. When a surety files a UCC financing statement under the indemnity’s assignment clause, it can crowd your borrowing base. Some lenders treat surety claims and collateral calls as defaults under loan covenants. If you plan to negotiate out of personal indemnity, bring your lender into the conversation early. Lenders like to see that your bond capacity will not vanish if one project stumbles. A well-managed corporate-only indemnity coupled with meaningful liquidity can improve your credit profile. A personal indemnity with a history of collateral calls can spook a conservative bank.
I have seen a contractor downgrade a revolver from 10 million to 7.5 million after a surety collateral call created a technical default. The culprit was not the amount of collateral, it was the covenant language about “material adverse change.” Work with counsel to align loan agreements and indemnity obligations so a routine surety demand does not set off alarm bells.
Negotiating leverage: what actually moves
Surety underwriters are pragmatic. They adjust indemnity requirements based on measurable signals.
- Financial statements. Reviewed or audited statements prepared by a construction-savvy CPA carry real weight. Underwriters focus on working capital, debt-to-equity, under-billings, and gross profit trends by job. Job history. A run of three to five years with no bond claims and timely closeouts creates trust. If you have disputes, show resolution discipline: mediation outcomes, net recoveries, and lessons applied to estimating or project management. Backlog composition. Balanced backlog across project types and owners reduces concentration risk. One mega-project can justify more conservative indemnity even for a strong contractor. Internal controls. Documented change order procedures, lien waiver tracking, and job cost reporting reduce surprises. Invite your surety for a desk review of your controls. That meeting often pays dividends at renewal time.
If you want to chip away at personal indemnity, propose stepping stones. Start with higher thresholds before collateral can be demanded, or a cap on personal exposure for projects below a certain size. Some sureties will accept a partial personal indemnity that burns off when your working capital exceeds a target for consecutive quarters.
Risk allocation across entities and families
Mid-sized contractors often operate with an operating company, a real estate holding company for equipment and yard property, and a management company. A global corporate indemnity that sweeps all entities can compromise your internal risk siloing. Push for clarity about which entities indemnify. If the surety insists on cross-indemnity, consider rent and service agreements that reflect arm’s-length economics. Courts will look through sham separations if a claim arises, but well-documented separations can prevent the surety from taking a bulldozer approach to asset recovery.
On the personal side, married owners should understand how indemnity interacts with estate plans. Joint assets, revocable trusts, and community property rules can pull a spouse into a claim even without a signature, but a signed spousal indemnity removes many defenses. If your spouse is reluctant, raise asset carve-outs. Sureties sometimes accept schedules that exclude specific assets, such as a primary residence up to a homestead value, in exchange for higher corporate liquidity or an irrevocable letter of credit. Those deals are uncommon, but they exist in the upper middle market.
The real cost of “no personal indemnity”
From time to time, a contractor is offered corporate-only indemnity by a new surety eager to win the account. The premium might be a hair lower, the service enthusiastic. Before you jump, watch the retention and collateral posture. A surety that declines personal indemnity may compensate with stricter pre-bid approvals, deeper funds control, or aggressive collateral demands at the first hint of trouble. I once saw a contractor accept corporate-only indemnity and celebrate, only to discover six months later that every bond over 2 million required pre-approval and a 10 percent collateral holdback. Their cash cycle seized up, and the supposed freedom from personal risk turned into operational handcuffs.
On the other hand, a well-structured corporate-only program with a top-tier surety can unlock growth. One client moved from a 50 million program with personal indemnity to a 100 million program without it after five claim-free years and a tangible net worth north of 30 million. The surety relationship was seasoned, and the agreement included a measured collateral clause with objective triggers. That program lowered friction with their bank and private equity partners and let them bid larger design-build work without bringing spouses into the room.
Claims handling and the “good faith” trap
Most indemnity agreements make the surety’s settlement decisions conclusive in the absence of fraud or lack of good faith. Contractors often read that and assume “good faith” equals “reasonable” or “best effort.” Courts give sureties wide latitude. If the surety investigates, hires consultants, documents options, and selects a completion plan that a reasonable claims professional might choose, it likely meets the standard. Even if you believe you could have done it cheaper, you may still be bound to reimburse.
To manage this, front-load communication. If a claim seems inevitable, present the surety with a documented plan to finish, including schedules, cost-to-complete, and vetted subcontractor quotes. Offer partial collateral that matches the realistic worst case, not the nightmare scenario. The more credible your plan, the harder it is for a claims department to justify takeover or high-cost tender in the name of caution.
Practical steps before you sign
You do not need a law degree to read an indemnity agreement well, but you do need patience and context. If I were advising a contractor taking on a new bond program tomorrow, I would work through a simple discipline:
- Map assets and exposures. List corporate entities, their assets, intercompany receivables, equipment, and real estate. On the personal side, list liquid assets, retirement accounts, and any trusts. Know what you are actually offering up. Stress test collateral. Ask what collateral the surety would demand if your largest project faced a 10 percent overrun and 60-day delay. Get numbers, not generalities. Compare that to your available cash and lines. Sync with your bank. Share the indemnity posture with your lender. Adjust covenants and borrowing base language to contemplate surety liens and collateral without tripping a default. Seek targeted edits. If the surety will not drop personal indemnity, ask for measurable thresholds before collateral is triggered, or a partial cap that burns off with milestones. Even small changes can matter under pressure. Document controls. Provide your surety with a packet on project controls, change orders, and WIP reporting. The better they understand your discipline, the less likely they are to panic when a job gets choppy.
Edge cases: joint ventures, design-build, and fast-growth traps
Joint ventures are fertile ground for indemnity surprises. A JV bond often requires indemnity from each JV partner and sometimes from the parents of each partner. If you are the smaller partner teaming with a national GC, read the JV agreement carefully. Flow-down clauses can leave you bearing a disproportionate share of a completion plan if the larger partner negotiates with the surety from a position of strength. Negotiate internal indemnity within the JV that mirrors your economic share and decision rights.
Design-build projects, with their higher design liability and change risk, tend to produce more contentious claims. Sureties see that. Expect tougher collateral terms if your backlog tilts heavily toward design-build without strong in-house design management and professional liability coverage. If your corporate indemnity is the only backstop, you may be pushed to park a letter of credit as a standing cushion.
Fast growth stresses indemnity. A contractor that doubles revenue in a year often outruns controls. Under-billings spike, retainage balloons, and the next thing you know the surety is asking questions. I have watched growth-stage firms lose personal indemnity concessions because their WIP turned sour even though cash remained positive. Growth is the moment to over-communicate, not to assume yesterday’s leniencies will carry forward.
Personal risk management if you must sign
Sometimes the market gives you no choice. You need personal indemnity to secure the bond program that will feed your pipeline. You can still protect the household with common-sense planning that stays on the right side of fraudulent transfer laws.
Keep personal liquidity diversified and documented. If a collateral call arrives, speed matters. A line of credit secured by a taxable investment account can be the difference between a calm negotiation and a default notice. Maintain clean records that show personal and corporate monies never commingle improperly, which reduces noise in a dispute.
Review titling of personal assets with counsel in your state. Homestead protections vary widely. Retirement accounts enjoy varying degrees of protection as well. Do not play shell games with last-minute transfers, but do take advantage of legitimate structures long before a crisis.
Build a rainy-day reserve inside the company that is visible and credible to the surety, even if it means a slightly lower distribution for a year or two. I have watched a 500,000 contingency reserve avert a 1 million collateral demand simply because it gave the surety comfort that unanticipated overruns had a home.
What owners often miss on day one
New bond programs feel like a victory. You walk out with capacity that lets you compete for larger work. Buried in the celebration are two operational habits that pay off later.
First, job closeout discipline. Push final paperwork, releases, and punch lists aggressively. Claims fester in the tail. If you can compress closeout cycles by 30 days across the board, you reduce the window in which rumors and disputes turn into formal notices that trigger collateral.
Second, storytelling with data. Every month, present a simple WIP narrative alongside the numbers. Show what moved, Click here for more info where margin faded or improved, and why. Tie it to field events, design decisions, or owner behavior. Underwriters are human. They remember who explains reality in a way that matches later outcomes. That memory shows up when you ask for less personal exposure.
The bottom line on personal vs. corporate
Personal indemnity puts your household on the hook, but it can unlock capacity you cannot achieve otherwise. Corporate indemnity keeps the risk inside the enterprise, but it requires proof that the enterprise can absorb shocks. In many cases, you will live with both for a time, then use performance, liquidity, and trust to chip away at the personal side.
Treat the indemnity agreement as a living instrument. Align it with your banking, your internal controls, and your growth plan. Read the triggers, not just the promises. Ask how the clauses would behave on your hardest project on your worst day. If the answers make sense, sign and build. If they do not, negotiate while you still have leverage, not after a cure notice lands on your desk.
The surety is not your enemy. It is a cautious partner that hates surprises. Personal or corporate, indemnity is the price of that partnership. Pay it wisely, and it will finance your ambitions rather than cap them.