Types of Indemnity Bonds

By: Alex Burke | Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance | Updated March 06, 2019

An Indemnity bond is a surety bond used by governments, businesses and individuals to establish assurance that an agreement will be fulfilled as stated. The indemnity bond outlines a pledge to compensate, financially or otherwise, one party if the second party fails to fulfill a contract or obligation. Different types of indemnity bonds are offered by a surety for a variety of business situations. Examples include bid bonds posted when someone's trying to land a contract, performance bonds guaranteeing work by a contractor, bonds posted to acquire government permits and any other cases where someone is posting money to guarantee something will be done.

Tip

An indemnity bond is a pledge to pay someone if an obligation isn't met. They're used in a variety of different situations in business to help build trust between transaction participants.

Understanding a Surety Bond

Most indemnity bonds are surety bonds, meaning that the money guaranteeing the pledged action will take place is posted by a third party, called a surety company. This company is essentially providing insurance that the company making the guarantee will perform what is asked of it. If it fails to do so, the surety company will forfeit the amount of the bond and seek to collect from the bond company.

Bail bonds, where a surety pledges money that can be forfeit if someone breaks the conditions of his release from jail while awaiting trial, work in a similar way.

Defining a Bid Bond

Projects acquired through a bidding process require a company to review project requirements, determine cost and figure a total bid price. Typically, the company with the lowest bid price is awarded the contract. A bid bond is used to assure the project owner that the bidder intends to follow through as outlined in its bid. The bond also assures that the bidder will also provide any other bond purchases, such as obtaining a performance bond and a payment bond.

They're usually defined and required in the document calling for bids on the contract, so participants will know whether they're willing to post such a bond before they bid.

Performance and Payment

Performance bonds are obtained as part of a contract between a project owner and a company doing work for the project owner. A performance bond protects the owner financially if the contractor fails to complete the project as outlined.

Payment bonds guarantee that the contractor will pay subcontractors, material suppliers and laborers hired in association with a contract.

Permits and Licenses

Individuals who open businesses may be required by state or local law to obtain a permit or license to operate. Each type of permit or license outlines provisions that a holder must qualify for before obtaining the license, including any bonds that must be posted as a condition of licensing.

Permit and license indemnity bonds assure the company's customers that the business meets all requirements connected with the license or permit. For instance, a plumber or electrician is usually required to complete training in that field before qualifying as a licensed tradesman. The license bond is a means to qualify that training.

Miscellaneous Indemnity Bonds

Miscellaneous indemnity bonds are designed to cover items not found in or defined in a general contract. A miscellaneous bond is usually very specific and might include protection from lost securities; a guarantee to pay utility bills or to provide a certain service; or to guarantee a specific benefit for employees, such as employer contributions for union benefits, or workers' compensation for self-insured employees.

This bond might be required by law, or private parties might use it to facilitate a business transaction.

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About the Author

Alex Burke holds a degree in environmental design and a Master of Arts in information management. She's worked as a licensed interior designer, artist, database administrator and nightclub manager. A perpetual student, Burke writes Web content on a variety of topics, including art, interior design, database design, culture, health and business.

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