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What is Letter of Indemnity Meaning, Process, Template & More awake



May 25th, 2022 What is Letter of Indemnity Meaning, Process, Template & More

The reference document is being prepared again because of some errors from the admin side but we are sure that delivery will be made without any concern to involved parties. A Letter of indemnity shields the one party to a transaction against possible consequences that may arise from the other party’s failure to perform. They are common when a party has a duty to perform construction services or transport property.

Letters of indemnity can also be used when a second party borrows something of value from the first party, such as a car or a power tool. In this case, the first party (the owner) can present the second party (the borrower) with a letter of indemnity stating that any damages are the sole responsibility of the borrower. This type of letters are similar to insurance policies in the sense that they cover for potential losses experienced by one of the parties involved in a certain agreement.

  • In contract law, an indemnity is a contractual obligation of one party (the indemnitor) to compensate the loss incurred by another party (the indemnitee) due to the relevant acts of the indemnitor or any other party.
  • However, take note that there are also other alternatives, such as requesting extra free days of port storage and demurrage until the original documents are in the hands of the consignee.
  • In the following situation, the bartender and an intoxicated customer got involved in a fight, which resulted in the customer throwing a glass at the barman.
  • The letter, as noted above, is a reassurance that the customer won’t suffer a loss because you couldn’t fulfill your part of the bargain.
  • The customer may be reluctant to accept the shipment because they have no way of knowing if it’s complete.

And these third-party institutions pay the financial compensation, on behalf of the promisor, to the losing party in a loss. Because of its vitality in the shipping process, every transaction should be accompanied by a letter of indemnity. Otherwise, parties can lose their valuables and suffer financial losses and damages in case of fortuitous events or others’ failure to comply with the terms of their contract. In an agency context, a principal may be obligated to indemnify their agent for liabilities incurred while carrying out responsibilities under the relationship.


This may result in money loss or failure to obtain the consignment or receive less than the stated quantity of goods or damaged products. To conclude, a letter of indemnity is a guarantee given by a third party to compensate for any financial damage to the parties involved. Here, the third party takes responsibility on behalf of the parties to the contract and says that it will cover losses incurred if certain obligations have not been complied with. One example is in moving companies or delivery services, or aptly, importation and exportation. In this scenario, a letter of indemnity will ensure that the owner of the goods or cargo will be compensated in case it is lost, damaged, or stolen during the shipping process.

  • However, if the subject of the LOI is valuable, it’s recommended that it be signed and acknowledged by a bank, insurance company, or professional operative in lieu of a regular witness.
  • Indemnification is aimed at providing financial protection, especially against potential lawsuits.
  • This allows the consignee to secure the cargo without having to wait for the BLs, which could save costs.
  • To indemnify someone means that you will ensure that that person is not held liable for something or is financially protected against certain losses.

If some cost is incurred in a suit for indemnity, it can be recovered from the indemnifier. The indemnity holder is entitled to compel him to pay the costs that have been incurred in a suit. Provided that the suit is in respect of any matter where the indemnity contract applies. You may need a letter of indemnity whenever you are doing a business transaction where you are taking a certain level of risk.

Is a Letter of Indemnity legally binding?

In this arrangement, one party agrees to pay for potential losses or damage. An LOI is a legal document, and hence its terms and conditions are legally binding on the signatories. An LOI is issued for many types of cases, but the terms may be legally enforceable only when it is issued for actions that are not illegal or prohibited by law.

What is the Letter of Indemnity in Shipping

In England and Wales an “indemnity” monetary award may form part of rescission during an action of restitutio in integrum. The property and funds are exchanged, but indemnity may be granted for costs necessarily incurred to the innocent party pursuant to the contract. The leading case is Whittington v Seale-Hayne,[4] in which a contaminated farm was sold. The contract made the buyers renovate the real estate and, the contamination incurred medical expenses for their manager, who had fallen ill. Once the contract was rescinded, the buyer could be indemnified for the cost of renovation as this was necessary to the contract, but not the medical expenses as the contract did not require them to hire a manager.

What is a Letter of Indemnity insurance?

A Letter of Indemnity (LOI) is a written contract between two parties where one party ensures financial coverage to the other, safeguarding them against potential losses or damages. As with any other form of insurance, indemnity insurance covers the costs of an indemnity claim, including, but not limited to, court costs, fees, and settlements. The amount covered by insurance depends on the specific agreement, and the cost of the insurance depends on many factors, including the policyholder’s history of indemnity claims.

A letter of indemnity is a legal document where one or both contracting parties guarantee to indemnify the other party or a third party in certain events. A letter of indemnity, or indemnity bond, functions similarly to insurance. One party secures a letter of indemnity from a bank to provide to another party with whom they will undertake a transaction. If the party securing the letter of indemnity fails to perform its obligations to the other party, the other party can seek payment from the financial institution. With indemnity insurance, one party commits to compensate another for prospective loss or damage. In insurance policies, in exchange for premiums paid by the insured to the insurer, the insurer offers to compensate the insured for any potential damage or losses.

Letters of indemnity are requested by one of the parties to guarantee the other that there will be no potential uncovered losses he might suffer due to contractual stipulations breaches. As mentioned earlier, an LOI is usually prepared and drafted by third-party institutions like banks and insurance companies. It is their role to compensate either of the parties involved in the shipping transaction when the other party fails to meet the terms of the contract. A shipper typically issues an LOI, when it’s requesting a carrier to operate outside its standard practices.

However, some courts have limited the enforceability in cases where the damage or loss that occurred was held to be unreasonably extreme or logically unforeseeable by the party who would be liable to pay for the damages. A letter of indemnity states that any damages caused by the first party to the second party, or to the second party’s belongings, are the responsibility of and are facilitated by the third party, as per the contractual agreement. In that sense, LOIs, which are also referred to as “indemnity bonds” or “bonds of indemnity,” are similar to insurance policies known as indemnity insurance. Here, the document exempts a party from any liability arising from the other party. For example, when the goods are being transported through a risky or dangerous route. This means that in the event of a mishap, the carrier will not be responsible for any damage to the goods.

In simple terms, a letter of indemnity (or LOI) is a document in which one party (i.e. the promisor) guarantees the other party that certain provisions will be met between them. And if, in any case, the other party faces any loss or damage due to the conduct of the promisor or any third party, then the suffering party will be compensated. LOIs are also commonly issued in scenarios where carriers are requested to handle special types of equipment or cargo types. A letter of indemnity in this scenario ensures that the carrier is exempt from liability for cargo or equipment mishandling. A letter of indemnity is mainly used when the carrier is requested to step out of its standard contractual obligations, at the request of the cargo owner (also the signatory of the LOI).

What is a Letter of Indemnity (LOI)?

The main objective of the letter of indemnity is to protect a party from any unexpected loss incurred during the transaction. When a party accepts the condition made by the other party, it is a promise as per the Indian Contract Act. One of them is the indemnifier, and the other is the indemnified, or the indemnity holder. The LOI is basically required to protect a person or a business from such claims for which they are not directly responsible. It outlines those measures and clauses that are there so that the aggrieved party does not suffer any harm.

Indemnity: What It Means in Insurance and the Law

An LOI bond is a contractual, legal document that assures one party against the other for any financial loss or potential costs involved in a shipping contract. The bond legally binds one or both parties to compensate each other for any loss or liability caused by an unforeseen incident or circumstance. These letters are often used in shipping and international trade, to cover losses or damages during the transportation of goods. However, they can also be used in various other business transactions, including property leasing and contract performance assurances. The key objective of an LOI is to ensure that the parties involved in a contract comply with all the stated requirements and then stick to the agreement to avoid losses amidst a transaction.

So here comes the concept of indemnity, through which ‘A’s rights can be protected. A letter of indemnity is essentially a legal document where a party agrees to indemnify another party in certain events. In most commercial contracts, the contracting parties will consider indemnification language where one party indemnifies another or where both parties mutually indemnify one another.

Under normal circumstances, carriers release the cargo to the owner upon presentation of the Original Bill of Lading (OBL). There are certain scenarios where the original BL may not be available at destination upon arrival of the vessel. Dear Sir/ Ma’am,
The purpose to write you this letter of indemnity is to instruct you to release the parcels of ref. code GH5675 to Mr. Tulip of Longshaw Automobiles, at New York port, but with no production of lading bill. Following are the important tips that need to be put in mind while writing letter of indemnity.