GUEST COLUMN
The General Agreement of Indemnity (GAI):
A Surety’s Best Friend,
A Contractor’s Worst Enemy
Bonding challenges
Surety and bonding require-
ments and consequences un-
doubtedly create some of the
greatest business and legal lia-
bility for North Carolina contrac-
tors – and disputes relating to
the bonding process certainly
create plenty of work for special-
ist construction lawyers.

These two articles con-
tributed by Brett Becker (Nexsen
Pruet) and Luke Farley (Conner
Gwyn Schenck PLLC) address
some important but perhaps
misunderstood risks and issues.

We’ll continue to cover surety
challenges in future issues.

12 — Summer 2018 — The North Carolina Construction News
By Luke J. Farley, Sr.

Special to North Carolina Construction News
A general agreement of indemnity
(GAI) can be a surety’s best friend
when a contractor starts to show
signs of trouble on a project. For that
same contractor, though, a GAI can
be its worst enemy.

A general agreement of indemnity
is a three-way contract between the
surety, the bond principal (that is, the
contractor), and (usually) the individ-
ual owners of the contracting com-
pany and their spouses. Under the
GAI, the bond principal, the individual
owners, and the spouses—together
called “indemnitors”—agree to pay
back the surety for any costs incurred
as a result of issuing the bonds. Most
contractors with a bonding line have
probably signed a GAI at some point.

From “time immemorial” 1 sureties
have enjoyed a basic, common law
right to be reimbursed by their bond
principal. 2 A GAI expands those rights
in two major ways.

First, a GAI will make the individual
owners of the company and their
spouses liable to the surety when
they otherwise wouldn’t be. At com-
mon law, the surety could only seek
indemnification from its bond princi-
pal. 3 If the bond principal was a cor-
poration, the owners of the company
and their spouses were shielded
from liability. 4 The surety can get
around the corporate shield by requir-
ing the individual owners and their
spouses to agree to be directly liable
to the surety as a condition of issuing
the bond. If they don’t sign the GAI,
then they don’t get the bond. Having
both spouses sign a GAI has signifi-
cant consequences. If the surety later
files a lawsuit against them and wins,
the surety can potentially seize and
sell the family home to collect a judg-
ment. 5 If you and your spouse sign a
GAI, be sure you understand what
you’re putting on the line.

Second, the GAI gives the surety
powerful legal tools for dealing with
the risk created by an insolvent princi-
pal before the surety actually incurs li-
ability to a bond claimant. These
tools go beyond just indemnification
and allow the surety to be proactive
in mitigating risk. A recent case de-
cided by a federal court in Virginia
shows how a GAI can strengthen a
surety’s position when dealing with a
principal who finds itself on shaky fi-
nancial ground.

In the case of Allegheny Casualty
Co. v. River City Roofing, LLC 6 the
surety issued payment and perform-
ance bonds for three separate proj-
ects. The bond principal was a
roofing contractor. As is common
practice in the industry, the surety re-
quired both the bond principal and
several individuals (presumably the
owners of the roofing company and
their spouses) to sign a GAI.