An indemnity bond is a written agreement in which a financial institution promises to pay a firm that has lent money if the money is not returned. It is a type of surety bond in which any organization that suffers losses in the case of a loan will be repaid. It is a guarantee that any organization with loan losses will be paid back. The word “indemins” is a Latin word that means free from loss.
An indemnity guarantees the obligee that the money will be returned or compensated in the event of a loss or failure by the principal. This bond protects the lender in case the borrower defaults on the legal terms of paying it back. This bond is non-negotiable in the sense that if it is not fully signed, it will not be approved. For example, if the person fails to pay the agreed amount at the agreed time, his or her property or corporate assets will be used to reimburse the obligee. It is primarily used in accounting, mortgage lending, IT, insurance companies, and law.
The bond bids on the following entities:
1. The principal: is the firm or person that requires the bond. The person who seeks the loan is to be covered by the bond.
2. The obligee: the authority imposing the bonding requirement.
3. The surety: the surety company, the body providing the written bond
WHAT IS AN INDEMNITY BOND?
An indemnity is a legal right given to the surety body to collect from the principal any amount the surety has paid to the obligee in a claim situation.
Indemnity has consequences if not properly understood. If at the end of the day, the company fails to pay its claim, then the reputation of the company will suffer. Not paying a claim can lead to bankruptcy, and future clients will view the company as incompetent and unprofessional. Sometimes, legal action will be taken against the company involved.
It is critical to read the bond form so that you have a complete or extensive understanding of what you are getting into. A financial expert can help you decide when you need an indemnity bond to protect your investment.
USES OF AN INDEMNITY BOND
- It safeguards the two parties from loss. That is, it serves as a mediator between the principal and the obligee to ensure that no one gets hurt at the end of the contract.
2. It guarantees financial compensation in the event of a breach of the agreement due to illegal activities by the principal against the obligee.
3. It also works like a surety bond agreement: the guarantor pays the obligee in case the principal defaults.
TYPES OF INDEMNITY BOND
There are different types of indemnity bonds for different scenarios. They are:
- Loan agreement
- Lease agreement
- Commercial contract
- Supply agreement
- Licensing agreement
- Legal contract
1. Loan agreement: it is a type of indemnity bond. The obligee receives financial security from an indemnity bond. It protects the lender from any breach of the agreement by the borrower. This type of indemnity bond is used in the case of a loan, either from a private or government body.
2. Lease agreement: This type of indemnity bond is used in the scenario of a lease of a property. If the principal damages or destroys the property in violation of the agreement, the owner is paid or compensated.
3. Commercial contract: This type of indemnity Bond can also be referred to as a business bond. This agreement protects businesses. It is required in different types of businesses and industries.
4. Supply agreement: If there is a disruption or damage caused by the supplier to the product, an indemnity bond will be paid to the customer.
5. Licensing agreement: it is a type of indemnity bond that is issued when acquiring a license.
6. Legal contract: This indemnity is issued to professional contractors for a contract. For example, while building a home, a contractor you hire will present this type of bond to avoid fraud.
WHEN TO GET AN INDEMNITY BOND
There are situations where you seriously need to be indemnified. Some of these situations are:
a. Purchasing a car: When an auto dealer sells a vehicle, state law requires them to obtain an indemnity bond in the event of a fraudulent act or breach of contract.
b. Buying a home: State law will also require a mortgage broker to issue a bond when dealing with either the buyer or the seller. This indemnity bond is designed to protect customers from a fraudulent act or breach of trust.
c. Building or renovating a home: In a situation where you are trying to build or renovate a home, the contractor you want to hire might be required to bring an indemnity to shield you from any breach of contract, any fraudulent act, or any default act from the contractor.
d. Taking a loan: indemnity can also be used when borrowing money. For example, if you are taking out a loan or a mortgage, you will be required to present a bond. It provides financial security to your obligee in the event of a default.
HOW TO BUY AN INDEMNITY BOND
Some insurance companies sell indemnity bonds, though not all of them do. You can get it by searching thoroughly online to find a reputable indemnity bond company to buy from.
Once you get an insurer, you will need to fill out some forms to assess your overall business risk, and a background check will also be conducted. Your credit reports will also be reviewed to determine your creditworthiness.
Once you have been approved by the company and the party has agreed to the terms, you will be required to obtain an indemnity bond. A premium is typically a percentage of the amount acquired by the bond. Depending on your creditworthiness, you may be required to pay anywhere from 1% to 7%.
COMPANIES THAT SELL INDEMNITY BOND
- Alliant Insurance Company
- American contractor indemnity
- Antilles Insurance Company
- Atlantic Specialty Insurance Company
- Berkley Insurance Company, etc.
An indemnity bond shields a party from significant financial loss. It gives financial security to money lenders, business associates, etc. When purchasing a home, property, or car, or building a house, you may need to obtain an indemnity bond to protect yourself from fraud and breach of contract.