A surety bond indemnity agreement is a contract between the principal and the surety company, that transfers risk from the surety to the principal. While the bond itself is created by the obligee, an indemnity is a separate agreement that the surety requires the principal to sign prior to issuing the bond that guarantees the principal is responsible for repaying any money paid by the surety in the process of settling a claim.

Surety companies issue bonds with the assumption that there should be close to zero risk of financial loss on their part. It is important to remember that a bond is similar to a line of credit because it prevents the principal from tying up their own money. However, if a claim is filed and the principal is unwilling to repay the surety, the indemnity agreement gives the surety the right to take legal action and collect repayment plus any incurred expenses. By signing an indemnity, the principal transfers liability for damages from the surety to themselves.

The greater the likelihood of claim activity or risk within an industry, plus the higher the bond amount requires a closer look at the application by an underwriter and request for a signed indemnity.