Quick Answer
An indemnity bond is a type of surety bond that guarantees the principal will fulfill a contractual, legal, or regulatory obligation. If the principal fails to do so, the surety may compensate the obligee for covered losses, and the principal must reimburse the surety for any valid claim payments under the General Agreement of Indemnity (GAI).
Key Takeaways
- An indemnity bond is a type of surety bond, not insurance.
- The bond protects the obligee, not the principal.
- The principal must reimburse the surety for valid claims.
- Most surety bonds require a General Agreement of Indemnity (GAI).
- Common indemnity bonds include bid bonds, performance bonds, payment bonds, and license bonds.
Indemnity bonds are commonly used in construction, government contracting, licensing, and other industries where financial guarantees are required.
Unlike traditional insurance, which transfers risk to the insurer, an indemnity bond provides a financial guarantee backed by the principal’s promise to reimburse the surety for any valid claims paid on its behalf.
Understanding the General Agreement of Indemnity (GAI)
Indemnity means protection against loss. In surety bonding, it is established through a legal contract known as the General Agreement of Indemnity (GAI).
When a business obtains a surety bond, it signs a GAI agreeing to reimburse the surety for valid claim payments, investigation costs, attorney fees, and related expenses. This creates one of the most important distinctions between surety bonds and insurance.
Because the surety expects to be reimbursed for valid claims, underwriting focuses on the applicant’s financial strength, credit history, experience, working capital, and ability to meet its contractual obligations.
Surety Bonds vs. Insurance
Traditional commercial insurance is designed to absorb covered losses. If an insurance company pays a claim, the policyholder is generally not required to repay the insurer.
A surety bond works differently.
- Financial Guarantee: If the surety underwriting company pays a valid claim to the obligee, the principal is legally obligated to reimburse the surety for the full amount paid.
- Underwriting Review: Because the principal assumes ultimate financial responsibility, sureties carefully evaluate an applicant’s personal credit history, business financial statements, industry experience, work history, and available working capital before issuing a bond.
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Whether you’re applying for a contractor license, bidding on a public project, or securing a commercial surety bond, our surety specialists can help you understand the requirements and explore your bonding options.
Understanding the Three Parties in a Surety Bond
To better understand how indemnity works, it helps to look at the three distinct parties involved in every surety bond agreement.
| Role | Who They Are | What They Do |
| The Principal | The business, contractor, or individual | The party required to purchase the bond and fulfill the underlying legal or contractual obligations. |
| The Obligee | The client, project owner, or government agency | The entity requiring the bond and protected from financial loss if obligations are not met. |
| The Surety | The underwriting company | The financial institution that backs the bond and may pay valid claims. As your agency or broker, Surety Bond Professionals places your bond with these underwriters. |
Why Are They Called Indemnity Bonds?
The term “indemnity bond” is commonly used because most surety bonds require the principal to indemnify, or reimburse, the surety for valid claims, investigation costs, attorney fees, and other covered expenses.
In practice, contract bonds, license bonds, and many commercial surety bonds all operate under this structure.
Common Types of Indemnity Bonds
Construction and Contract Bonds
Contract bonds are among the most common forms of indemnity-backed surety bonds.
- Bid Bonds guarantee that a contractor will enter into the contract and provide the required bonding if awarded the project.
- Performance Bonds protect project owners if a contractor fails to complete the work according to the contract terms.
- Payment Bonds guarantee payment to subcontractors, laborers, and material suppliers working on the project.
License and Permit Bonds
Many states and municipalities require businesses to obtain license bonds before receiving authorization to operate. These bonds help protect consumers and government agencies by guaranteeing compliance with applicable laws and regulations.
Common examples include:
- Auto Dealer Bonds
- Contractor License Bonds
- Freight Broker Bonds (BMC-84)
- Mortgage Broker Bonds
- Various professional license bonds
Real-World Example of Indemnity Liability
The following example illustrates how indemnity obligations work in a real-world construction bond claim.
Suppose a contractor obtains a $500,000 performance bond for a public construction project.
After the contractor defaults, the surety investigates the claim and determines it is valid. The surety pays $150,000 to help complete the project. Under the General Agreement of Indemnity, the contractor must reimburse the surety for the claim payment and related expenses.
This financial accountability is why sureties place significant emphasis on financial strength, experience, and creditworthiness during the underwriting process.
What Happens If a Claim Is Filed?
While bond claims are relatively uncommon, understanding the process is important for any bonded business. The lifecycle of a claim typically follows four stages.
Stage 1: Claim Submission
The obligee formally notifies the surety that the bonded party has failed to fulfill its contractual or legal obligations.
Stage 2: Independent Investigation
The surety conducts a thorough investigation and reviews evidence provided by both the obligee and the principal.
Stage 3: Claim Resolution
If the claim is determined to be valid, the surety may compensate the obligee for covered losses up to the maximum face value of the bond.
Stage 4: Reimbursement Enforcement
The surety seeks repayment from the principal under the legal terms established in the General Agreement of Indemnity.
How to Obtain an Indemnity Bond
- Complete a bond application.
- Provide financial and business information for underwriting.
- Sign the General Agreement of Indemnity (GAI).
- Pay the premium and receive your bond.
Approval times vary depending on the bond type and amount. Many standard license bonds can be approved and issued quickly, while larger contract bond programs may require additional underwriting review.
Frequently Asked Questions
How Much Does an Indemnity Bond Cost?
Most bond applicants pay an annual premium rather than the full bond amount. Premiums are typically a small percentage of the bond value, often ranging from 1% to 3% for well-qualified applicants. Pricing is based on factors such as credit history, financial strength, industry experience, and the type of bond being requested.
Can I Get an Indemnity Bond With Bad Credit?
Yes. Many surety companies offer specialized programs for applicants with less-than-perfect credit. While annual premiums may be higher due to the increased risk profile, obtaining the necessary bond is often still possible depending on the applicant’s overall financial condition.
Is Personal Indemnity Required?
In most commercial and construction bonding situations, yes. Sureties generally require business owners to personally sign the General Agreement of Indemnity. This makes the individuals personally responsible for reimbursing the surety if a valid claim is paid.
Does Every Surety Bond Require Indemnity?
Most surety bonds require the principal to sign a General Agreement of Indemnity (GAI). While requirements can vary by bond type and surety company, indemnity is a standard part of most commercial and contract surety bonds because it obligates the principal to reimburse the surety for valid claim payments and related expenses.
Who Is Responsible for Repaying a Surety Claim?
The principal is responsible for repaying the surety after a valid claim is paid. Under the General Agreement of Indemnity, the principal agrees to reimburse the surety for claim payments, investigation costs, attorney fees, and other covered expenses.
Is an Indemnity Bond the Same as a Performance Bond?
No. An indemnity bond is a general term describing a surety bond backed by a General Agreement of Indemnity. A performance bond is a specific type of contract surety bond that guarantees a contractor will complete a project according to the contract terms.
Why Do Surety Companies Require a General Agreement of Indemnity?
Surety companies require a General Agreement of Indemnity because the principal—not the surety—is ultimately responsible for losses. The agreement gives the surety the legal right to recover valid claim payments, investigation costs, attorney fees, and other related expenses from the principal and any indemnitors.
Learn More About Your Bonding Options
Understanding indemnity is one of the most important aspects of obtaining a surety bond. Whether you’re pursuing a contractor license, bidding on a public project, or expanding your commercial bond program, understanding your obligations can help you avoid claims and build stronger relationships with surety companies.
If you have questions about bonding requirements, underwriting, or indemnity agreements, the team at Surety Bond Professionals can help you understand your bonding options and navigate the bonding process.
Need Help Obtaining an Indemnity Bond?
Whether you need a contract bond, license bond, or another commercial surety bond, Surety Bond Professionals works with more than 40 surety markets to help businesses secure competitive bonding nationwide. Contact one of our experienced surety advisors to request a complimentary Surety Program Review.
