What Are Indemnity Bonds?

Indemnity bonds are a major subset of surety bonds. Their purpose is to guarantee financial reimbursement for any harm caused by illegal actions on the side of the bonded party.

The bond represents a contract between three entities. The principal is legally required to obtain a bond. The obligee is the party that imposes the bonding. The surety guarantees the financial compensation will be covered if the principal fails to abide by the set agreement and the law. In essence, the indemnity bond can indemnify the obligee in case the principal does not perform their obligations.

When getting indemnity bonds, the principal signs an indemnity agreement with the surety provider. It states that the full financial responsibility in case of bond claims belongs to them rather than the surety.

The typical indemnity bonds that a wide range of individuals and businesses have to obtain are commercial bonds. They are also known as license and permit bonds, as they are a common requirement when applying for a professional license. Local, city, state and federal authorities may require license bonds before they allow an entity to operate within a regulated business field.

Below you can find more information about the most widely used indemnity bonds.

Auto dealer bonds

In most states, car dealers have to post a dealer bond. State authorities in charge of motor vehicles impose the bonding requirement. In this way, they ensure that car buyers have an extra layer of protection against fraud and misuse on the side of auto dealers.

Contractor license bonds

Many cities and states require contractors to get a license or permit before they conduct any construction activities. Often a contractor license bond is one of the major criteria in the process.

Mortgage broker bonds

Mortgage broker bonds are another common type of license bonds. In many states, they are required of mortgage brokers who want to obtain a license to operate. These bonds function as a safety net for brokers’ customers against potential fraudulent activities.

How much does it cost to get bonded?

The price of your indemnity bond depends on the bond amount that is required of you and on your financial situation. In order to get bonded, you have to pay a bond premium. It is a small fraction of the bond amount. For applicants with good credit, the bond rates are in the range of 1% and 5%.

As for your personal and business finances, your surety focuses on your credit score, company financials, and any liquidity and assets that you have. This is how it measures the level of risk involved in the bonding, or how capable you are to pay any bond claims if such a situation arises.

While it’s more difficult to get bonded with bad credit, there are still options. Our Bad Credit Surety Bonds program offers bonding even for applicants with problematic finances. The bond premiums are typically slightly higher, between 5% and 10%

Do you want to learn more about the bond cost formation? You can consult our extensive surety bond cost page.

How are bond claims handled?

The process through which an affected party can obtain a compensation from a principal’s indemnity bond is by making a bond claim. The claimant can be either the obligee, or another party empowered by the obligee to seek reimbursement.

If the bonded party does not perform their duties under the contract or specific legal obligations set in the bond language, there is a clear reason for a bond claim. Typically, the claimant first contacts the principal and the guarantor (the surety) and files a written notice. The surety will often attempt to reach a mutually beneficial agreement, so that the case does not escalate to a claim.

The financial compensation that a harmed party can seek is up to the penal sum of the bond, namely the bond amount that has been posted. If the case is proven, the principal needs to make all payments to the claimant. In situations where they fail to do so, the surety can take over the immediate payment to the affected party. However, it will seek full reimbursement from the bonded party.