An indemnity bond is an important financial product to own in order to protect your business against unexpected loss due to a lack of performance. Business owners who want to hold others responsible for not completed work stated in a contract should become familiar with the working dynamics of these types of bonds.
- Indemnity bonds assure the holder of the bond will be compensated in the event of a loss.
- The bond contains three entities: the principal, obligee, and the surety.
- The most common indemnity bonds are commercial bonds.
- Indemnity bonds generally cost between 1-10% of the required bond amount.
What is an Indemnity Bond?
An indemnity bond gives a person or entity the legal right to collect damages due to financial loss experienced from poor conduct or lack of performance. The purpose of an indemnity bond assures that the holder of the bond will be compensated in the event of a loss. Indemnity bonds are a type of surety bond.
The indemnity bond acts as an insurance policy against the failure of a party to fulfill the obligations they have agreed to in their contract. If a party fails to meet the obligations under the bond agreement, then the party which is protected under the bond will be indemnified for their losses.
In exchange for the loss amount covered under an indemnity bond agreement, the company or individual is required to pay a premium, much like you would with a standard insurance policy. The premium will depend on the agreed amount under the indemnity bond agreement.
How Does an Indemnity Bond Work?
An indemnity bond typically works with three entities: the principal, obligee’ and the surety.
- The principal is either you or your business. The principal is responsible for making the premium payments on the bond.
- The obligee is the party that is imposing the bond, such as the state or local municipality.
- The surety is the party that provides you with the bond and backs it. This tends to be an insurance company and they receive a premium for providing you with the bond.
To obtain an indemnity bond, you have to sign an indemnity agreement with a surety provider. The indemnity bond is a way to guarantee that you will fulfill your obligations under a legal agreement.
When is an Indemnity Bond Required?
There are many different business industries in which an indemnity bond is a requirement. Some of the most common indemnity bonds are commercial bonds. They are put in place to guarantee that commercial contracts are executed as agreed upon.
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Depending on the industry you work in, the local or state authorities may require you to obtain a license bond before they provide you with the actual operating license.
Some of the most common commercial bond examples include:
- If you operate a car dealership and also depending on the state you operate in, you will most likely be required to obtain an auto dealer bond. The auto dealer bond protects the consumer from potential fraud.
- If you’re planning to become a mortgage broker you will need to obtain a mortgage broker bond in order to be get your state operating license. This bond protects consumers from possible mortgage-related fraud.
- If you’re any sort of construction contractor you need to hold a contractor license bond in order to be get your contractor’s license. The bond protects homeowners and clients from potential fraud or failure to complete a job.
How Much Does an Indemnity Bond Cost?
It’s worth noting that the cost of the bond will depend on the type of industry you are in. Indemnity bonds will typically cost between 1-10% of the requirement of the bond
Important Note: Your personal credit and business financials will have an impact on your premium amount. As such, it’s important to have clean financials and good credit history.
Different Types of Indemnity Bonds
Indemnity bonds vary based on the industry you are operate in , as well as your state or local regulations. Let’s take a look at some of the different types of indemnity bonds that currently exist.
Leases ( Lease Bond)
A lease agreement is a legally binding contract that requires the lessee to pay the lessor for property, vehicles, or other products and services. An example would be a lease agreement for an apartment. A lease bond guarantees that the tenant (lessee) will make their rental payments to the landlord (lessor).
A commercial contract is a legally binding agreement that holds one party responsible for actions that result in a loss from a specific action. One of the most common is contractor’s insurance. It cover’s your business from potential losses that may result from work-related accidents. It typically covers skilled trades like:
- Heating and Cooling
A loan agreement is a contract between a lender and borrower. It holds both parties accountable for following the terms of the agreement. This can include bonds on loans like:
- Auto loans
- Student loans
- Payday Loans
A licensing agreement is an agreement between the owner (licensor) and the renter (licensee). The licensor gives legal permission to the licensee to use their property, technology, goods, and services under specific rules and guidelines established by the licensing agreement.
This is common with products in which the inventor grants legal permission to a company to use their process or products for a specified fee.
How Do You Get an Indemnity Bond?
To get an indemnity bond, you’ll have to establish and sign an indemnity agreement with a surety provider. Below is a list of online surety providers.