When a surety company, such as UFG 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.

There are many situations where these bonds may be needed. Almost any case where an obligee might suffer some kind of financial loss as a result of a principal failing to honor the obligations specified in a National Indemnity Company contract would be a situation where a bond would be appropriate.

Indemnity bonds are often used in the construction industry as a guarantee of contractor performance. For instance, when a project manager would stand to lose considerable income if the electrical work were not completed on time by a contractor, the project owner might require a bond to be purchased by the electrical contractor as a guarantee against potential losses. Learn more about construction surety bonds.

These bonds might also be purchased by an instructor at an educational institution. That institution may want to maintain its reputation and avoid any losses that may occur as a result of any change in the instructor’s status. As an example, the instructor might experience reputational damage for some reason, and the educational facility strongly prefers to avoid a similar outcome, so it will invoke the bond claim as a result.

Another application of indemnity bonds is when someone loses a stock certificate. To recover the full value of that certificate, it would be necessary to approach the certificate-issuing authority and prove that you are the legitimate owner of that certificate. It is likely that the authority would then require the purchase of an indemnity bond so that it does not lose the value of the shares if the original certificate surfaced and is claimed by another party.

There are also government indemnity schemes, which offer an alternative to the high cost of insurance for art galleries as an example, to display certain artifacts or paintings to the public, as a guarantee against any damage that may occur in the process of hanging and displaying the artwork.

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, and this can be done very easily online. 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.

Reach out to NFP to learn more about the meaning of indemnity bond, and get the ball rolling today! From process server bonds to BMC-84 bonds, we can write any bond type in all U.S. states! Contact us to learn more.