What is an indemnity bond and do I need to ask for one?

What is an indemnity bond?

An indemnity bond (also called a surety bond or fidelity bond) is a form of insurance purchased by one party to a contract as a means of compensating a second party to the contract, should the first party fail to deliver on its promises or perform its obligations. The bond is guaranteed by a third party (usually a bank) which agrees to pay the second party if the first party defaults.

Under what circumstances would an indemnity bond be used?

There are many scenarios in which an indemnity bond might be required by one or more of the parties to a transaction. For instance, bid bonds are commonly used in situations where projects are offered through a bidding process.

Bid bonds ensure that the successful bidder follows through on the promises set out in its bid. Payment bonds are used extensively in construction projects to guarantee that the general contractor pays all of its subtrades and suppliers, to protect the project owner against exposure to lien claims.

An indemnity bond could be used to avoid double payment by a company redeeming its shares in the event of a lost share certificate, or to indemnify a freight carrier for delivery of a shipment of goods if the bill of lading is lost.

Is an indemnity bond the same as a personal guarantee?

No - these are two different types of obligations. A guarantee (or guaranty) is a promise to pay the indebtedness of a corporation or business if it becomes unable to meet its financial obligations, up to the full amount of the debt. An indemnity is a promise to protect the indemnified party against any losses it may suffer in connection with the transaction, without limit.

Do I have to get a lawyer to prepare the bond?

No, you can purchase a bond from any financial institution or insurance company. But you should review it with your lawyer so that he/she can explain exactly what the legal implications are.