Understanding Indemnity Bonds
An indemnity bond is a type of surety bond that guarantees financial compensation if one party fails to meet its obligations. In most cases, it ensures that the party required to perform a duty (the principal) will reimburse another party (the surety) for any losses the surety covers on the principal’s behalf.
Like all surety bonds, an indemnity bond is a three-party agreement:
- Principal: the person or business required to obtain the bond.
- Obligee: the entity requiring the bond, such as a government agency or project owner.
- Surety: the company that issues the bond and guarantees the principal’s performance.
If the principal fails to meet the bond’s conditions, the surety compensates the obligee for valid claims—and the principal must then repay the surety in full. This repayment obligation is what defines the bond as an indemnity bond.
How an Indemnity Bond Works
When a principal purchases a bond, the surety issues it as a financial guarantee that the principal will fulfill certain legal, professional, or contractual obligations.
If the principal fails to do so, the obligee can file a claim against the bond. The surety investigates the claim and, if it finds it valid, pays the obligee up to the bond’s full amount. After paying the claim, the surety seeks reimbursement from the principal. This reimbursement is based on the indemnity agreement, a legal document signed when the bond is issued.
In short:
- The obligee requires the bond to protect its interests.
- The surety issues the bond on behalf of the principal.
- If a claim occurs, the surety pays and then seeks repayment from the principal.
The surety’s promise to pay does not remove liability from the principal—it simply ensures the obligee is protected immediately. The indemnity clause transfers the financial burden back to the principal afterward.
Surety Bond vs Indemnity Bond
While the terms “surety bond” and “indemnity bond” are often used interchangeably, they have slightly different meanings.
A surety bond is the broader category—it includes all bonds that guarantee a principal’s performance or compliance. An indemnity bond is a specific type of surety bond that contains a formal indemnity agreement requiring repayment to the surety.
All surety bonds operate on the principle of indemnity, but not all require a separate indemnity form. Smaller, low-risk license bonds are sometimes issued instantly without a full indemnity agreement. In contrast, higher-value or higher-risk bonds—such as construction performance bonds or commercial fidelity bonds—almost always require one.
Understanding this distinction is important. While both protect the obligee, an indemnity bond explicitly holds the principal legally responsible for reimbursing any losses, including legal and investigative costs, that the surety incurs while resolving a claim.
When an Indemnity Bond Is Required
Indemnity bonds are commonly required whenever a financial or performance obligation exists that carries risk for the obligee. They provide assurance that the surety and the principal will absorb any loss, not the obligee.
Typical examples include:
License and permit bonds
Many professionals—such as auto dealers, mortgage brokers, contractors, or freight brokers—must post bonds to obtain or maintain state licenses. These are often indemnity bonds since they guarantee ongoing compliance with laws and regulations.
Construction bonds
Contractors frequently need indemnity-based performance and payment bonds to guarantee project completion and proper payment to subcontractors and suppliers.
Commercial or fidelity bonds
Businesses that handle client money or sensitive assets may need indemnity bonds that protect against theft, fraud, or mismanagement.
Lost instrument bonds
Used when a financial document like a cashier’s check or stock certificate is lost, requiring a guarantee against future claims.
Indemnity bonds are most common in industries or transactions where failure to meet an obligation could cause significant financial harm.
Key Terms and Features of Indemnity Bonds
An indemnity bond contains several core components that define its legal structure and responsibilities.
Indemnity agreement
The indemnity agreement is a legally binding document that requires the principal to repay the surety for any losses, claims, or expenses related to the bond. It typically includes language authorizing the surety to settle claims at its discretion and to recover those costs from the principal.
Indemnitor
The indemnitor is the individual or entity agreeing to provide indemnification—usually the business owner, their company, or even spouses or partners who co-sign. This ensures the surety can recover funds if a claim occurs.
Scope of indemnity
The indemnity obligation typically covers all financial losses, claim payouts, attorney fees, investigative costs, and other expenses the surety incurs while resolving or defending a claim.
Right to collateral
If the surety believes a claim is likely, it can request collateral from the principal to cover potential losses. This right is usually built into the indemnity agreement.
Duration
The indemnity obligation continues as long as claims could arise from the bond, even after the bond itself has expired. Obligations under the indemnity agreement may extend until all claims are resolved and the surety is fully reimbursed.
Together, these features ensure that the obligee is protected, the surety’s financial risk is recoverable, and the principal remains accountable.
Cost of an Indemnity Bond
The cost, or premium, for an indemnity bond depends on the bond amount, the applicant’s credit score, and the risk associated with the obligation.
Most indemnity bond premiums fall between 0.5% and 10% of the bond amount. Applicants with good credit and strong financials typically pay around 1% to 4%. Those with weaker credit or limited experience may pay a higher percentage due to increased risk.
For example, a $50,000 indemnity bond might cost:
- $500 to $2,000 for excellent credit (1–4%)
- $2,500 to $5,000 for lower credit (5–10%)
Because the indemnity agreement exposes the surety to potential reimbursement risk, underwriting is often stricter than for instant-issue bonds. The surety may request financial statements or other supporting documents before approving the bond.
Risks and Responsibilities for the Principal
Signing an indemnity bond is a serious financial commitment. When the principal signs the indemnity agreement, they are agreeing to take full responsibility for any claim paid by the surety.
This includes repayment of:
- The full amount of any claim paid.
- All legal, investigative, and administrative costs incurred by the surety.
- Any additional expenses related to enforcing indemnity or recovering funds.
In some cases, the indemnity agreement allows the surety to place liens on assets or take possession of collateral if repayment is not made. The obligation is personal, meaning both the business and the individual owner may be liable.
Principals should review the indemnity language carefully before signing to understand the scope of liability and ensure they are financially prepared for potential obligations.
How to Evaluate or Negotiate an Indemnity Agreement
Although indemnity agreements are standard in surety bonding, applicants can take steps to understand and manage their risk.
1. Read the agreement carefully.
Understand what losses and expenses you are responsible for and how the surety can act on your behalf.
2. Review broad language.
Some agreements include open-ended clauses allowing the surety wide authority to settle claims or demand collateral. Clarify any uncertain terms before signing.
3. Maintain strong credit and finances.
A solid financial profile reduces the need for collateral and may help secure better renewal rates or terms in future bonding.
4. Understand your personal exposure.
If you co-sign personally or with a spouse, both parties can be held responsible for repayment.
5. Keep documentation organized.
Maintain clear project, payment, and compliance records to minimize claim risk and support your defense if a dispute arises.
While indemnity obligations cannot usually be removed, informed review and responsible financial management can minimize exposure.
Frequently Asked Questions
What does “indemnity” mean in a bond?
Indemnity means financial responsibility for loss. In an indemnity bond, the principal agrees to repay the surety for any claim costs.
Are all surety bonds indemnity bonds?
Nearly all surety bonds include an indemnity provision, but not all require a formal indemnity agreement. Smaller, low-risk bonds may not involve additional paperwork.
Can I get an indemnity bond with bad credit?
Yes, but the rate will be higher—typically 5–10% of the bond amount. You may also need to provide financial statements or collateral.
How long does indemnity liability last?
Your obligation remains until all claims related to the bond are resolved and the surety is fully reimbursed, even after the bond expires.
Do indemnity agreements increase cost?
Not directly. The indemnity itself doesn’t add cost, but higher-risk applicants who require indemnity bonds often pay more due to underwriting.
What happens if I refuse to sign an indemnity agreement?
The surety will likely refuse to issue the bond. Indemnity is a non-negotiable condition for most surety bonds involving financial or performance risk.
Conclusion
An indemnity bond is a specialized type of surety bond that guarantees performance or compliance and requires the principal to reimburse the surety for any losses it pays out. It ensures that the obligee is protected, while the principal remains accountable for their actions and any resulting financial consequences.
Indemnity bonds are common in licensing, contracting, and financial service industries—anywhere trust and accountability are essential. By understanding how they work, reviewing the indemnity agreement carefully, and maintaining good financial health, principals can meet their obligations confidently and protect themselves from unexpected liability.
