Indemnification bonds protect parties in a transaction from loss due to a substitute interest. They are used in various transactions, including real estate and art sales, to provide insurance against outside interference. Buyer beware refers to a buyer’s responsibility to ensure the seller has the legal right to sell the property. Indemnity bonds can compensate buyers for losses in such cases. An example of indemnity in US history is bonds mined for the purchase of slaves. Indemnity bonds are also used in real estate transactions where the mortgage is more than a certain percentage of the property’s value.
Indemnification bonds are insurance policies that protect the owner, buyer and any other party to a transaction against loss caused by a substitute interest. The bond guarantees that the party receiving the benefit of the settlement, usually the buyer, will not have to give up his interest without receiving compensation if someone asserts a claim that overrides his newly acquired interest. This type of bond can be used in a variety of transactions, but the commonality is the desire to provide additional insurance against an outside party interfering in the transaction.
The business transaction concept called buyer beware refers to a buyer’s responsibility to ensure that the seller has the legal right to sell the property in question. For example, if a buyer buys a stolen property from a seller who later goes missing, the buyer would have to return the property to its rightful owner and lose his or her money. The buyer’s only recourse would be against the seller, who may never be found. An indemnity is an insurance policy that protects the buyer in this case by compensating him or her for having to return the stolen property to a person with a replacement claim.
An early example of indemnity in US history are bonds mined for the purchase of slaves. If the slave was later freed by the government, the slave owner would be compensated for the loss. In a more current context, an indemnity bond would be issued in a transaction in which a person was seeking to sell his interest in a company but lost his stock certificates. The insurance policy would protect the company, the transfer agent and the buyer from someone later showing up with the certificates in hand and voiding the transaction.
Another common and appropriate use of indemnity bonds is in the sale of works of art. During World War II, many works of art were stolen from institutions and individuals and never returned. Several countries have passed laws allowing these previous owners to recover their artwork once they have been identified, even if the piece has subsequently been sold to innocent buyers multiple times. As a result, title to any pre-WWII artwork may be subject to an unanticipated claim, and a bond would protect a current buyer from that type of loss.
Indemnity bonds are also frequently used in real estate transactions where the underlying mortgage is more than a certain percentage of the property’s value. If the property goes into foreclosure and is sold at a discount, your insurance policy will make up the difference between the loan amount and how much the property sold at auction. In this way, an indemnity is a type of surety, ensuring that all parties receive the benefit of their business.
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