Letter of Indemnity (LOI)

A Letter of Indemnity (LOI) is a written promise to compensate a party for specified losses or liabilities that may arise if another party fails to meet contractual obligations. LOIs are commonly used to reduce risk and enable transactions to proceed when there is uncertainty or a temporary gap in documentation.

Key takeaways

• An LOI shifts financial responsibility for specified losses from one party to another (or to a third-party guarantor).
• They are widely used in shipping, trade, lending, property transactions, insurance settlements, and situations involving lost documents.
• Proper wording and execution are essential for legal enforceability; institutions such as banks or insurers often act as guarantors.
• Always include clear parties, scope, exclusions, duration, and signatures; get legal review for significant risks.

What an LOI does

An LOI obligates the indemnifying party to reimburse or defend the indemnified party against losses, damages, claims, or liabilities set out in the letter. It functions similarly to a contract or an insurance promise and may be used as a substitute or a temporary measure while formal documentation is awaited.

Common uses and practical examples

• Shipping and trade: A carrier may accept cargo release against an LOI when the original bill of lading is delayed or missing. The LOI assures the shipper or carrier they will be compensated if a dispute arises.
• Lost financial documents: If a stock or bond certificate is lost, an LOI can allow the issuer to reissue certificates while protecting the issuer against double claims if the original surfaces later.
• Service and construction contracts: Contractors may provide an LOI backed by an insurer to show they will cover certain damages or incomplete work.
• Insurance claims: An insurer or insured may issue an LOI to permit provisional payment or settlement while a claim dispute is resolved.
• Loans and property: Lenders may require an LOI to cover potential liabilities (e.g., environmental remediation, legal fees). Sellers may provide LOIs to buyers to indemnify against undisclosed title defects or encumbrances.
• Borrowed items: When lending valuable items (cars, equipment), the lender or a third-party insurer may issue an LOI to cover loss or damage.

Practical examples:
* Painters present an LOI from their insurer to a homeowner showing the insurer will cover damages caused during work, reducing the homeowner’s financial risk.
* An investor who lost a stock certificate provides an LOI to the issuing company accepting responsibility to indemnify the company if the original certificate is later presented.

Who issues an LOI?

LOIs can be issued by:
* One of the contracting parties (less common for significant exposure)
* Third parties such as banks, insurance companies, or corporate guarantors — these are preferred for larger or higher-risk transactions because they add financial credibility.

What to include in an LOI

Essential elements to ensure clarity and potential enforceability:
* Full legal names and addresses of all parties (indemnifier, indemnitee, and any guarantor)
* Clear description of the subject matter (goods, documents, property, or obligations)
* Scope of indemnity (what is covered and any explicit exclusions)
* Duration or effective date and any termination conditions
* Monetary limits, if any, and payment terms
* Procedure for making claims or asserting indemnity
* Signatures of authorized representatives and the date
For valuable assets or significant risk, have a recognized institution sign and obtain legal review.

Risks and enforceability

• Wording matters: Ambiguous or overly broad language can render an LOI ineffective or lead to disputes.
• Jurisdictional differences: Courts vary in how they treat LOIs; some jurisdictions may scrutinize them heavily, especially where they substitute for statutory or contractual formalities (e.g., original shipping documents).
• Credit risk: An LOI is only as good as the issuer’s ability to pay. A guarantor with weak financial strength may not provide meaningful protection.
• Legal compliance: LOIs cannot override mandatory law or regulatory requirements.

Best practices

• Use clear, precise language defining covered losses and procedures for claims.
• Limit indemnity to foreseeable, quantifiable risks where possible.
• Obtain guarantor backing from a reputable bank or insurer for material obligations.
• Keep a written record of all related documents and correspondence.
• Seek legal advice before issuing or accepting LOIs in high-value or complex transactions.

Conclusion

A Letter of Indemnity is a practical instrument to allocate risk and allow transactions to proceed when full documentation or certainty is not available. When carefully drafted, supported by a credible guarantor, and reviewed for legal compliance, LOIs enhance commercial confidence and protect parties from defined losses.