Indemnity Bond

What Does Indemnity Bond Mean?

An indemnity bond is an agreement in which one party agrees to provide financial reimbursement to another party if that party experiences specific types of losses. It is similar to an insurance policy in that regard.

Indemnity bonds are commonly used in the mortgage industry to help reduce risk for lenders.

Insuranceopedia Explains Indemnity Bond

Because mortgages often range from hundreds of thousands to millions of dollars, they represent significant financial investments for lending institutions. As a result, lenders can face major losses if borrowers default on their mortgage loans. To mitigate this risk, many mortgage lenders seek indemnity bonds from third parties. These bonds can provide reimbursement for up to 75 to 80 percent of the property’s total value, helping to reduce the chances of large financial losses for the lender.

Indemnity bonds protect the lender, but borrowers still need their own homeowners insurance to cover the property itself. Most mortgage lenders require a policy at closing, so comparing quotes from the best homeowners insurance companies and checking the average cost of homeowners insurance is worth doing before you sign.