Surety, subrogation, and indemnity sound like complex terms, and contracts involving them can create complicated legal matters. But understanding what these terms mean and how they affect your business contracts is the first step toward proper legal protection and peace of mind. Here is what you need to know.
What is Surety, and Is It the Same as Insurance?
Surety, or a surety bond, is when one party guarantees the debts of another party. More specifically, the surety is the organization or the person who’s assuming responsibility for paying a debt, in case the debtor ends up in default or is not able to make payments.
Surety is not the same thing as the standard types of insurance most people think of. For example, homeowners’ insurance protects the home, vehicle insurance protects the car and its drive. But surety is used to guarantee that the principal (the person being “insured”) will properly complete a contract with someone else. In other words, if you hire a contractor to replace your roof, they will have a company bonding them, stating that they will do the work you contract for. “Licensed and bonded” is important.
What is the Difference Between Subrogation and Indemnification?
Subrogation is the process of substituting one party for another when it comes to rights or claims. For example, if you’re in a car accident that wasn’t your fault, your insurance company will pay your claim. Then they will seek to have the insurance company of the party that caused the accident make them whole again, by returning to them what they had to pay out to you.
Indemnification is the “hold harmless” language that is often seen in contracts. Essentially, it is used by a party to say that one person suffers a loss, but another one pays for it. Insurance is a form of indemnity because, while the homeowner who lost their house in a fire suffered a loss, the company that insured the house will be the one that has to pay for that loss. The insurance company is indemnifying the homeowner.
Who Has the Right of Subrogation?
Most insurance carriers have the right of subrogation. They need this right so they can seek out compensation from other individuals or companies, when they have to pay claims for their policyholders. By being allowed to “step in” for their policyholder, they can recover money that they paid out to that policyholder already, and that was paid due to the negligence of another party.
Subrogation is not a lien, although some people confuse the two. A lien is placed on property for work that has already been completed but hasn’t been paid. An insurance company does not have a right to lien property, but it does have a right to request compensation reimbursement.
If you have questions about surety, subrogation, or indemnity and need legal advice, reach out to us today. At Lanak & Hanna, we can help you get the answers you need, for your business’ legal questions.