Collateral, Indemnity, and Financial Responsibility
What this domain tests
This domain is about the money behind the bond: what the indemnitor promises, how collateral is taken and held, and where the financial exposure actually lands when a defendant runs.
The indemnity agreement
Every bond is backed by a signed indemnity agreement. Its scope normally reaches the face amount of the bond, the surety's costs of locating and recovering the defendant, attorney's fees, and court costs. Indemnitors are typically jointly and severally liable, and the obligation is continuing - it does not end when the case ends if a forfeiture is still open. Read the agreement before promising an indemnitor that exposure is capped at the collateral posted; usually it is not.
Handling collateral
- Accepted forms include cash, funds held in escrow, mortgages or deeds of trust on real property after appraisal and title search, and bank instruments.
- Give an itemized written receipt for every item and identify whose property it is.
- Segregate collateral from operating funds. Commingling is both a recordkeeping violation and a route to personal liability.
- Perfect liens promptly; an unrecorded mortgage on real property is nearly worthless in a dispute.
- Return collateral, with an accounting, only after written exoneration or discharge.
Financial responsibility
Sureties require agents to remain solvent and may require a build-up or reserve fund against outstanding bonds. The surety pays the court on a forfeiture and then demands reimbursement from the agent under the general agreement of indemnity; the agent in turn collects from the indemnitor and collateral. Courts may also demand justification of the surety, so keep certificates of authority and current financial information available.
Worked example
A $100,000 bond is forfeited. The surety pays the court, then bills the agent for $100,000 plus $4,200 in recovery costs. The agent holds $30,000 cash collateral and a second mortgage on a house worth $90,000 with an existing $80,000 first mortgage. Recovery yields $30,000 cash and little from the mortgage, leaving the indemnitor personally liable for the deficiency and the agent exposed to the surety.
Traps that cost marks
- Telling an indemnitor the collateral caps his liability.
- Using collateral before exoneration or failing to segregate it.
- Accepting real property without appraisal, title search, or recorded lien.
- Releasing collateral on an oral assurance that the case was dismissed.