Indemnity bond is "a bond that promises to indemnify the obligee against losses stemming from the principal's failure to perform" (BusinessDictionary 2018).
What exactly contain indemnity bond
First of all, an indemnity bond is a kind of insurance policy that guarantee an appropriate performance of a contract. Indemnity bonds are common in a business. They are used as a mechanism to guarantee payment. An indemnity bond aims to repay the holder of the bond for a loss or expence. According to Ch. Morin, "there are usually three parties to an indemnity bond: the principal (the person who will receive the money in the case of a breach), the obligor (the person who purchases the indemnity bond as security for performance) and a third-party guarantor, usually a bank that, for a premium or fee, assumes the risk to pay the face value of the indemnity bond should the obligor fail to perform the terms of the contract with the principal" (Ch. Morin 2017). Payment is guaranteed due to indemnity bonds.
Practical application indemnity bond in Enterprise
There are many situations in which businesses need them. For instance, somebody chartered a stock certificate with a company. However, the company needed documents in paper instead of electronic registration and they were not able to deliver the paper certificate. In this situation, before the company’s broker could surrender the electronic registration, the company was able to demand purchasing an indemnity bond. When the paper documents were delivered later, the indemnity bond could pick up the tab of the worth of the paper certificate (Ch. Morin 2017).
There are some common kinds of indemnity bonds in business world. As J. Gautam pointed out, "apart from a General Insurance Policy, an Indemnity Bond is also drawn between employer and an employee, where an employee undertakes to serve the employer for a specific period of time and if he leaves the services before completion of the said term, then monetary compensation has to be paid" (J.Gautam 2018).
In case when somebody cannot find a share certificate, an indemnity bond is needed. Because the indemnity bond includes information confirming the lost of the share certificate and at the same time it asks for issuing an new one. An indemnity bond is also drawn in situation when an educational company puts an application for alteration to effect an insurance of any loss that can appear in the sequel of the modification in the basic particulars of the company which applies. What is more, it needs to be underlined that an indemnity bond might be carried out between an independent businessman and the government (J.Gautam 2018).
With this result, an indemnity bond might be performed between a lot of parties in the business deal or action of diverse nature. There are also many ways in which an indemnity bond may be realized. When there is a possibility of the holder’s loss, an indemnity bond assures compensation of costs. It needs to be underlined that an indemnity bond guarantees actions of a party in compliance with the agreement made in a contract. An indemnity bond is often demanded before replacement a legal paper which was lost, for instance a car title. In this situation, three parties take part in the agreement. According to J. Mancini," the principal is the person purchasing the bond. The obligee is the person benefiting from the bond. The surety, also referred to as a guarantor, charges a fee to assume the risk of the indemnity bond's value" (J. Mancini 2018).
For instance, there has been a loss. When somebody claims that they are the owner of another person’s car falsely, the local division of motor vehicle is able to show the indemnity bond in documents that the constituent was obliged to acquired. Many divisions and banks store an indemnity bond in documents but only for some time. Observing the deadline is important, for instance some of the divisions claim that indemnity bonds are kept in documents for three years (J. Mancini 2018).
- BusinessDictionary., (2018), Indemnity bond “Webfinance”
- Gautam J., (2018), Indemnity Bond "Interslice"
- Mancini J., (2018), How to Cash an Indemnity Bond "the nest"
- Morin Ch.,(2017), What Is an Indemnity Bond? "bizfluent"
Author: Joanna Piórkowska