What is an Indemnity Bond?
Indemnity bonds are one of the main types of surety bonds. They guarantee that anyone who suffers financial losses as the result of illegal actions by the principal will be reimbursed.
The bond works as a contract between three entities:
- The principal – the person or business legally required to obtain a bond
- The obligee - the party imposing the bonding requirements, often a state or local authority
- The surety – the body that provides the bond and backs it (a surety company)
In essence, the indemnity bond can indemnify the obligee in the event the principal doesn’t perform their legal obligations as per the terms of the bond.
To get an indemnity bond, the principal will need to sign an indemnity agreement with the surety. It states that, if a bond claim arises, the principal will carry the full financial responsibility of the claim rather than the bonding company.
Why Do You Need an Indemnity Bond?
There are a number of situations that might require you to purchase an indemnity bond. Some of the common indemnity bonds are commercial bonds. Commercial surety bonds guarantee the correct execution of commercial contracts.
Commercial bonds are also known as license or permit bonds because they are a common requirement when applying for a professional license. Local, state and federal authorities may require you to get bonded before they provide you with a license.
The most popular commercial bonds you may need are:
- Auto dealer bond - If you’re a car dealer, you’re likely to have to post an auto dealer bond. Most state authorities set bond requirements to ensure car buyers have an extra layer of protection against fraud and misuse.
- Contractor license bond - If you’re a contractor, you may need to get a contractor license bond in order to obtain your local or state license. Contractor bonds protect commercial clients and homeowners from contractors’ default and fraud.
- Mortgage broker bond - If you’re a mortgage broker, you’ll need to post a mortgage broker bond to get a state license. The bond acts as a safety net for your customers, protecting them against potentially fraudulent activities.
Surety bonds are often required in the construction industry when contractors bid on construction projects. They are also used by professional licensing bodies and by courts when appointing a guardian or fiduciary.
Types of Indemnity Bonds
There are a number of different types of indemnity bonds. Understanding the different types of bonds will help to ensure you find the correct bond for your needs.
A commercial contract is a legal document that makes one party responsible for a specific action. It can also compel a party to refrain from a certain activity.
A lease is a legally binding contract that requires the lessee to pay the lessor for the products or services that have been rented. This could include vehicles, buildings, and property.
Unlike commercial contract surety bonds which make one party responsible for completing an action, a legal contract ensures both parties will abide by the terms of the contract.
Actions covered by legal contracts include the exchange of goods and services. The agreement is binding, and legal action can be brought if one party fails to uphold their side of the contract.
Licensing agreements are arrangements between a licensor (owner) and a licensee (renter). The agreement allows the licensee permission to utilize property, goods or services under specific guidelines set by the licensor.
A loan agreement is a binding contract between a borrower and a lender. The agreement holds both parties responsible for upholding the terms of the contract.
Buyers and suppliers use supply agreements to ensure an exclusive relationship with each other. Supply agreements typically stipulate that the parties will do business with one another, buying and selling goods at a set price.
How Much Does an Indemnity Bond Cost?
Your bond cost, or bond premium, will be a small fraction of the total bond amount. The exact cost of your indemnity bond will depend on two factors: the bond amount you’re required to purchase and your financial situation. If your finances are in good shape, you can get bond rates in the range of 1% to 5%.
When subcontractors, small business owners and professionals apply for a bond, the surety underwriting the bond will examine their personal credit score, business financials and any fixed and liquid assets they may have. This information will help the surety calculate the level of risk involved in bonding the applicant. They’ll then be able to set the surety bond cost.
It’s more difficult to get bonded if you have bad credit. However, there are still options available for individuals and business owners with a poor credit score. Our Bad Credit Surety Bonds program is designed to help those with a difficult financial history to secure the performance bonds, commercial bonds, court bonds or license bonds they need.
The bond premiums for bad credit bonds are slightly higher – typically between 5% and 10%. The program allows applicants with a bad credit score to get the bond form they require and take the next step on the professional ladder.
What Are the Requirements for an Indemnity Bond?
There are lots of types of surety bonds available and the requirements depend on the exact indemnity bond that’s needed. If you’re not sure of your bond requirements, talk to your obligee (the project owner or authority that has asked you to get bonded) to find out more.
How to Get an Indemnity Bond?
Getting an indemnity bond is very straightforward. Apply online for a free quote to get the process started and find out how much you’ll need to pay.
You can get approved online and print your bond after purchasing it on our website. We can also send you a paper copy if required.
How Long Does it Take to Get an Indemnity Bond?
If you have a good credit score and have all your paperwork in order, getting an indemnity bond will be quick and easy. However, if you have a poor credit history or other financial or professional issues, you may find your application takes a little longer.