When a surety company, is obliged to pay the amount of a claim made against an indemnity bond made by a specific obligee, it would, of course, suffer an immediate loss. However, under the terms of the indemnity contract, it would have the right to recover any losses incurred by legally pursuing the principal to make good on those losses. The personal and corporate assets of the principal would become fair game in such cases, under the guidelines of the indemnity contract, and could pursued in a court case.
Any individual or company that failed to pay the amount of a claim made against these bonds could suffer reputational damage, as well as any legal action brought against it. It could also result in bankruptcy for the defaulting company if it for some reason was unable to pay the amount of a claim made against the bond.
When and Why Indemnity Bonds Are Needed
Indemnity bonds (a type of surety bond) provide a financial guarantee to protect one party (the obligee) if another party (the principal) fails to meet specific obligations. In practice, these bonds are required in various real-world scenarios where non-performance could cause a financial loss to the obligee. Key examples include:
Construction Projects: Indemnity bonds are widely used in construction as performance guarantees. For example, a project owner may require an electrical contractor to secure a performance bond (a form of indemnity bond) to ensure the work is completed on time and to specification. If the contractor fails to fulfill the contract, the bond provides funds to cover the project owner’s losses. NFP’s surety services support such needs by offering bid bonds, performance bonds and payment bonds that safeguard project stakeholders and keep projects on track.
Business and Permits: Many industries must post surety bonds as a condition of doing business. Examples include auto dealership bonds, construction bonds, contractors bonds, notary bonds, and mortgage broker bonds – these bonds are often legally required to ensure compliance with laws and protect consumers.
Educational Commitments: In the education sector, indemnity bonds can protect institutions from losses if a key individual or vendor doesn’t uphold their obligations. For instance, a private educational institution might require a bond from an independent instructor or service provider as assurance that they will deliver the promised curriculum or services. If the instructor’s contract is not fulfilled or an issue causes reputational or financial harm, the school can claim against the bond to mitigate its losses. This ensures continuity and trust in critical educational programs, and NFP can help arrange such specialized bonds as part of its commercial surety offerings.
Financial Document Replacement: Indemnity bonds also play a crucial role in financial recovery scenarios. If someone loses a valuable document like a stock certificate or cashier’s check, the issuing authority will often require a lost instrument bond (an indemnity bond) before issuing a replacement. This bond guarantees that the issuer won’t incur a loss if the original document resurfaces and a second claim is made. In practice, the lost instrument bond protects the issuer (obligee) by indemnifying them against duplicate payouts. NFP’s surety team is authorized to issue lost instrument bonds nationwide, ensuring individuals and businesses can quickly secure replacements for lost financial instruments.
In all these cases, indemnity bonds serve as a vital safety net, transferring risk away from the obligee. They ensure that if the principal fails to honor their obligations — whether completing a construction project, delivering educational services, or safeguarding financial assets — there is a financial mechanism in place to cover the resulting losses. NFP’s Commercial & Contract Surety practice provides comprehensive support for these indemnity bond needs, with expert guidance and tailored solutions for virtually every bond scenario. The result is peace of mind for businesses and institutions, knowing they have protection in place when it matters most.
Obtaining Your Indemnity Bond
When applying for an indemnity surety bond, contract language is extremely important. The terms of the indemnity contract will be used to justify the reasoning for an obligee to make a claim against the contract. This means the obligee will have a vested interest in making sure the language of the indemnity contract adequately covers their rights in pursuing a claim.
The first step in obtaining a bond is to locate a surety company authorized to sell them in your state. Then, an application form would have to be filled out and submitted to the insurance firm (the surety company), after which it would conduct a background check on the applicant for credit worthiness and any criminal record.
Indemnity Bond Cost
Based on the credit history of an applicant, a percentage amount would quoted as a premium to be paid for the bond. For instance, an individual or company with good credit history might only be assessed 1% of the bond amount as a premium, whereas an individual with spotty credit might have to pay 3% or 4% of the bond amount to account for the additional risk.
Assuming all three parties are in agreement over the terms of the bond and its cost, the bond would then be issued to a principal, and coverage would commence.
How NFP Can Help
Use the form below or call us directly at 866-540-4002 to get started. Our team will walk you through the bonding process, help you choose the right bond for your business, and provide a fast, competitive quote. Don’t hesitate to ask us questions during the process; part of our job is to guide you through the application, especially if you’re a first-time applicant. We pride themselves on helping small businesses get bonded by explaining the process and requirements clearly.
