An indemnity bond is a bond that is intended to reimburse the holder for any actual or claimed loss caused by the issuer’s conduct or another person’s conduct. An indemnity bond acts as coverage for the loss of an obligee when a principal fails to perform according to the terms agreed upon between the obligee and the principal. For example, in real estate, a lender may require an indemnity bond in markets with slow growth in cases where the loan amount is greater than 75% of the house value. During the time of foreclosure, if the house is sold to pay off the loan and there is negative equity, then the indemnity bond covers the difference.
When the legislature, in licensing occupational groups, requires a bond to protect the public, such a bond is an indemnity bond. A bond supposed to be an official bond, which is not conditioned by the applicable statute, may be considered as good as a common-law bond, although not enforceable as a statutory bond. For a public official to accept the bond of any person as a condition of such person’s receipt of a privilege, the bond should be empowered by law.
Since bonds are treated as contracts, a consideration is essential for a common-law bond to be enforceable. Where acknowledgment of a bond is statutory, such requirement cannot be waived by the obligee. Where a statute provides that bonds relating to real estate shall be executed, acknowledged, and recorded in the same manner as deeds, it is not mandatory that such bonds shall be executed, acknowledged, and recorded in that manner.
If an obligee is not named in the body of the instrument but the party to whom the bond is payable is clear, then such obligation shall not be void. When the obligors have affixed their signatures to the bond as witnesses to perform certain covenants and conditions, it will suffice to bind the obligors.
A bond procured by fraud, duress, or undue influence shall not be enforceable. A surety who affixes his/her signature on a bond is bound by such a bond and his belief about the genuineness of the forged name does not lessen his/her liability. Statutes that require a bond as a condition of some step, judicial proceeding, the exercise of a privilege, or to secure the performance of duties of the principal obligor, also require that such bond be executed with one or more sureties.