A Surety Bond Indemnity Agreement is an agreement between the principal and the surety bond company stating the company will be indemnified if it pays out a loss on the Principal’s behalf due to a surety bond claim. Indemnity may be defined as compensation for loss or a restoration to the approximate financial condition occupied before the loss occured.
In the case of a claim, the company would pay the amount of the surety bond to the obligee and then seek to be indemnified by the principal as governed by the indemnity agreement. For example, with construction surety bonds the principal may be required to provide bid bonds, performance bonds and payment bonds. If the contractor does not pay all the suppliers or subcontractors, a default on the payment bond may occur and the surety bond company required to pay these bills. The company would then seek to be reimbursed (or indemnified) by the contractor for the amount of the bills and any other expenses incurred from the default.
The indemnity agreement may either be an unsecured signature guarantee or may be collateralized up to 100% with some form of security, such as a cashiers check, CD assignment or bank letter of credit. Collateral is often required for bad credit surety bonds. Regardless of whether or not collateral is taken, most privately owned companies will have to provide company indemnity as well as the personal indemnity of the business owners.
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