What is the purpose of an indemnification agreement?

An indemnification agreement serves the purpose of protecting one party against financial losses that may arise from certain actions or events. In the context of surety bonds, indemnification agreements are crucial because they hold the principal liable for any claims made against the bond. This means if a contractor fails to fulfill their obligations leading to a financial loss for a bondholder or obligee, the contractor (principal) is required to reimburse the surety for that loss.

The agreement essentially transfers the risk of loss back to the principal, ensuring that the surety is not left bearing the financial burden caused by the principal's default. By having an indemnification agreement, the surety protects its interests, while also ensuring that there is a mechanism in place to recover any losses incurred due to the actions of the principal. Thus, the primary function of this agreement is indeed to protect against financial losses, making it crucial in the operations of surety bonds.