What Is a Letter of Indemnity LOI? Definition and Example

In 1825, Haiti was forced to pay France what was then called an “independence debt.” The payments were intended to cover the losses that French plantation owners “suffered” after losing land and slaves. While this form of indemnity was incredibly unjust, it is one example of many historical cases that show the ways indemnity has been applied worldwide. When the term indemnity is used in the legal sense, it may also refer to an exemption from liability for damage. In conclusion, LOIs are a necessary part of the smooth running of international shipping and trade. However, it would be unwise to adopt a casual approach when providing or accepting an LOI. As with all legal contracts, care must be taken to ascertain your risks and clearly identify who you are contracting with.

Liability for breach of contract

1. An activity may have its risks, which is one of the reasons why parents/legal guardians need to consent to an activity.
2. Indemnity clauses can be complicated to negotiate and can lead to increased costs of services because of the increased risk of the contract.
3. How effective and enforceable an LOI is depends on its precise wording and the jurisdiction in which it’s executed.
4. A letter of indemnity (LOI) is a document that guarantees certain provisions will be met between two parties to a contract or compensation will be provided.

The primary function of the letter of indemnity is to allow the shipper to operate beyond its contractual obligations, typically in response to a request from the cargo owner. A letter issued by a for-profit entity which promises by written confirmation to act as a 3rd-party on behalf of the first party in a transaction or contract. This 3rd-party covers loss or damage to the 2nd-party in the agreement caused by the first party. A LOI can provide important protection for one party of a contract if the other party fails to fulfill its obligations. In effect, the LOI assures that one or more parties in the contract will be held harmless.

A letter of indemnity would assure the customer that they would not suffer a loss if something is missing. For example, the consignee needs the goods urgently, or the shipping company wants to unload cargo quickly. However, any business considering accepting the terms of an LOI should ensure the scope of the agreement and indemnity is broad enough to adequately cover their risk.

Mis-delivery would also prejudice a carrier’s insurance cover, which would mean that the consequences are not covered by his P&I insurance. Flexport will require an LOI if the consignee is receiving cargo without the presentation of an endorsed original bill of lading; i.e. if the shipment is released with a telex release. The LOI confirms that Flexport can release the goods to the consignee without the original bill of lading.

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In cases where items of value are transported by moving companies or delivery services, LOIs ensure that the party that owns the valuables will be compensated if the possessions are lost, damaged, or stolen during transport. LOIs are generally signed when the valuable items are presented to the shipping company and before a bill of lading, which is a document issued by a carrier acknowledging receipt of the cargo. In some circumstances happens that, during transit, cargo is traded multiple times (this is especially true of the oil trade).

Without a letter of indemnity, the carrier could be held liable for lack of documentary evidence of the transactions, including who is the owner of the cargo when it reaches the port of discharge. 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. They are also used when a second party borrows something of value from the first party, such as a car or a power tool.

Another common form of indemnity is the reparations a winning country seeks from a letter of indemnity meaning losing country after a war. Depending on the amount and extent of the indemnity due, it can take years and even decades to pay off. One of the most well-known examples is the indemnity Germany paid after its role in World War I. Those reparations were finally paid off in 2010, almost a century after they were assessed. Often, such protection is granted to a group of people who committed an illegal act for the common good, such as the assassination of a known dictator or terrorist leader. Indemnity is common in agreements between an individual and a business (for example, an agreement to obtain car insurance). However, it can also apply on a larger scale to relationships between businesses and government or between governments of two or more countries.

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When is an LOI necessary?

Then you find out that the paint you agreed on is out of stock and there is no guarantee that the paint will be available any time soon. You might be wondering why you need to write an actual letter, rather than just talking to the person about the issue. An indemnity letter is a contract, and it must be in writing if you want to take it to court to make the other party deliver on its promises. Just talking about the issue, shaking hands, and making verbal promises will not be enough if the other party decides to take you to court. The IG LOI wording may therefore need amending if the invocation clause is intended to cover a wider range of situations than the two standard IG wordings. An act of indemnity protects those who have acted illegally from being subject to penalties.

This exemption typically applies to public officers, such as police officers or government officials, who are sometimes compelled to commit illegal acts in order to carry out the responsibilities of their jobs. In all the above instances, the carrier may have other options, such as to discharge into storage or to retain the cargo on board until the original bills of lading arrive or to simply refuse orders not in line with the charterparty. For example, let’s say you’ve misplaced a physical stock certificate and can’t find it. You can approach the company that issued the stock and provide it with an LOI that states that the stock certificate has been lost, destroyed, or stolen. It’s also a good idea to have witnesses or to get a notary public to verify the signatures. Shipa Freight is a digital freight forwarder powered by Agility, a pioneer in emerging markets.

Ideally, the signatures should be witnessed by a notary, but this is not essential. Here the shipper agrees to protect the shipping company against any possible consequences that may arise from issuing a clean bill of lading. Usually, a shipper needs a new bill of lading when the goods loaded onto the cargo vessel do not match those stated on the original bill of lading. Although indemnity agreements haven’t always had a formal name, they are not a new concept.

The potential risks of a LOI in shipping

Indemnity insurance is a way for a company (or individual) to obtain protection from indemnity claims. This insurance protects the holder from having to pay the full sum of an indemnity, even if the holder is responsible for the cause of the indemnity. However, exactly what is covered, and to what extent, depends on the specific agreement. The wording of the LOI, even where using the IG Group standard wording, should always be considered carefully against the circumstances. In “The Bremen Max” 2008 EWHC 2755 (Comm), the carrier was obliged to discharge against an LOI by the terms of the Charterparty. The wording of the LOI was held to contain a clear instruction as to who the cargo should be discharged to and a failure to do so meant that the charterer’s undertakings in the LOI were not engaged.

1. That’s because any claim made against the carrier could be for far more than just the value of the goods.
2. Banks or insurance companies issue LOIs to cover parties against financial losses from a breach of contract.
3. LOIs are generally signed when the valuable items are presented to the shipping company and before a bill of lading, which is a document issued by a carrier acknowledging receipt of the cargo.
4. (This might happen if you buy airline tickets for someone.) The credit card company may question the transaction because it doesn’t want the liability if you refuse to pay.
5. A shipment may arrive at a customer’s location but no bill of lading is available to check against the list of items in the shipment.
6. In a way, the third-party institution renders the parties harmless in case of a breach or delinquency by facilitating the transaction and restituting financial loss.

One of these documents is the letter of indemnity, which serves as a form of contract between the parties. LOIs state that any damage caused to a contracting party is the responsibility of the other party or a third party to the contractual agreement. For this reason, LOIs, also called “indemnity bonds” or “bonds of indemnity,” are like insurance policies known as indemnity insurance. A shipment may arrive at a customer’s location but no bill of lading is available to check against the list of items in the shipment. The customer may be reluctant to accept the shipment because they have no way of knowing if it’s complete.