- November 16, 2016
- Posted by: Surety Bond Experts
- Categories: Indemnity Bond, Surety Bonds
An indemnity bond ensures that the obligee (the party seeking that the principal applies for a surety bond) will be compensated in the case that a loss is incurred. It protects the lender from any loss if the principal (the party applying for the surety bond) defaults. If the principal fails to fulfill the contractual obligations (agreed upon by the obligee and the principal), the surety bond producer pays for the damages, and then seeks reimbursement from the principal. If the principal does not repay the surety bond producer, then corporate and personal assets will be used for reimbursement. It may also ruin the principal’s reputation and create a hurdle when applying for future surety bonds, bankruptcy and financial loss. This bond is non-negotiable, and, if not signed, the surety bond will not be approved.
As per the agreement, an indemnity bond also requires that the company pay a premium, which is a certain percentage of the full bonded amount. The percentage is determined by multiple factors, such as the financial history and solvency of the principal, the business history of the applicant and their credit score. There can be various reasons where an indemnity bond is required, such as in the construction industry, when buying a home, company or shares or when dealing with government indemnity.
A surety bond, like many legal documents, can seem overwhelming and written in a completely different language. Just as a lawyer is used to help decipher legal documents, a surety bond producer is needed to make sure that all parties are protected in a surety bond.
Summary: an indemnity bond is a required bond which guarantees that the obligee will be compensated in the case of a loss, by the surety bond producer, who will then seek reimbursement from the principal. An indemnity bond also requires the principal to pay a premium, which is determined by the financial and business reputation of the principal.
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