Indemnity BondCredit Repair Definition
A type of surety bond guaranteeing compensation for financial loss if a party fails to meet specific obligations.
Definition
An indemnity bond is a type of surety bond that provides a financial guarantee, ensuring that one party (the principal) will compensate another party (the obligee) for any potential financial loss or liability arising from the principal's failure to fulfill certain obligations or duties. It's a three-party agreement involving: (1) The Principal: The party whose obligations are being guaranteed; (2) The Obligee: The party protected against loss; and (3) The Surety: The insurance company issuing the bond and guaranteeing the principal's performance. If the principal defaults or causes a loss, the surety compensates the obligee, and the surety then seeks reimbursement from the principal based on an underlying indemnity agreement. Indemnity bonds are used in various situations, such as replacing lost financial instruments (like stock certificates), ensuring completion of construction projects, or guaranteeing compliance with court orders.
Frequently Asked Questions
How does an indemnity bond work?
The principal purchases the bond from a surety company for a premium. The bond guarantees to the obligee that if the principal fails to perform a specific obligation causing financial loss to the obligee, the surety will pay the obligee up to the bond amount. The principal is ultimately responsible for reimbursing the surety for any payments made under the bond.
What are common uses for indemnity bonds?
Common uses include: Lost Instrument Bonds (to replace lost stock certificates or cashier's checks), Contractor Bonds (like performance or payment bonds guaranteeing project completion and payment to subcontractors), Court Bonds (like appeal bonds or bail bonds), and License and Permit Bonds (guaranteeing compliance with regulations).
Is an indemnity bond the same as insurance?
No. Insurance is a two-party contract protecting the insured against their own losses. A surety bond (like an indemnity bond) is a three-party contract where the surety guarantees the principal's obligations to the obligee. Insurance anticipates losses, while surety bonds anticipate the principal fulfilling their obligations. If a surety pays a claim, they seek reimbursement from the principal; insurance companies typically do not seek reimbursement from the insured for covered losses.
Related Terms
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