Letter Of Indemnity: The Ultimate FAQ Guide

If you’re wondering what letter of indemnity is, then all answers you’re looking for is right here.

So if you want to learn more, read this guide.

What Is A Letter Of Indemnity (LOI)?

It’s a document that protects the goods’ owner or carrier against any financial outcome after releasing the goods.

It’s normally provided if you dont presentation of the original Bill of lading.

It’s a contractual document that ensures certain provisions will be met between the two parties involved.

Its main aim is to ensure party A doesn’t suffer any losses if party B fails them. Typically, it holds someone harmless.

The third-party facilitates any damage caused by party A to B or B’s properties.

An indemnity clause is common in leases, licensing agreements, supply agreements, and commercial and legal contracts.

Why Is Letter Of Indemnity Issued In Shipping?

It is an important document that ensures:

• Efficiency if goods have to be delivered to another port or destination.
• The indemnity protects the client against any uninsured risks.
• It provides solutions to irregularities that may occur in the trade.
• Waiting for the original Bill of lading may take few days or even more sometimes. Presentation of the letter of indemnity grants the recipient immediate access to the cargo.

They can save time and any additional fees like demurrage, storage, expenses, and insurance costs.

Who Are The Parties To A Letter Of Indemnity?

Typically, international trade involves two main parties that are; the buyer and the seller.

However, other parties are involved in making the entire process successful.

LOI parties include:

• The individual requesting the indemnity is usually the seller or buyer.
• The entity that accepts the request and performs the specific service against an LOI usually is the carrier.
• The parties that write risks that have been discussed and agreed on by all parties.
• The entity that signs the document, for example, a first-class bank
• , is also the party.
• This third party agrees to pay party A finances if party B fails to live up to its obligation.

When Is A Letter Of Indemnity Necessary?

Letter of indemnity is used in the following scenarios:

• If the carrier has been asked to deliver cargo without presenting the original Bill of Lading.
• This happens if the cargo got to the port before the Bill of Lading.
• When issuing a clean Bill of Lading
• When goods are released against lost original Bill of Lading
• If the cargo has to be delivered to another destination other than the one mentioned on the BOL or charter party

When issuing switch Bill of Lading

• When issuing antedated or postdated BOL
• When the carrier has been asked to continue with cargo operations when it’s raining, the ‘Rain’ letter is common in the steel trade.
• For carrying additional personnel on board, the ship
• Where split Bill of Lading is used

What Are The Undertakings Of A Letter of Indemnity?

Below are the agreements of the letter of indemnity. They include:

• The consignee and the bank is backing them up to undertake to indemnify the carrier against any repercussion.

These are which may occur as a result of delivering goods without the Bill of lading.

• The carrier bears risks to comply with the request of delivering cargo without the BOL. Hence they get the maximum possible security included in LOI.
• According to the standard letter, there is no limitation on indemnity or any cost arising.
• If a carrier faces a claim in tort for conversion of goods, then no contract exists between the receiver and the carrier.

This is because the carrier cannot depend on any limitation contained in the BOL.

• The claimant (receiver) may claim his actual losses that not only include the value of goods.

The cost of acquiring replacement on the market at short notice and downtime will be incurred by the actual owner of goods.

This greatly affects the value of cargo; hence as a carrier, it’s advisable not to accept the LOI limited to the value of the cargo.

• The indemnity is terminated after all original BOL of specific cargo are issued to the carrier, which normally takes years.
• Some receivers may offer indemnities that contain a clause that expires after 13 months meaning.

This means any cargo claim should become outdated under Hague-Visby rules after 12 months.

• In English law, the receiver has like 6years to initiate an action for a breach of contract. This period starts to run only when the claimant has discovered the fraud.
• A carrier that allows an indemnity that expires after 13 months only gets first notice for defending a major claim after the expiry of the indemnity.
• Indemnity has a lifespan.

It’s not relied on after 6 years because of the receiver.

The charter may not be in business or may not be in a position to indemnify the carrier.

How Does A Letter Of Indemnity Work?

It’s a contract between two parties who should meet. Party A agrees to pay Party B, who agrees to provide products or services.

If one party breaches the contract, the other party may suffer loss as a result.

The concept of indemnity is to hold someone harmless instead of having the person or business suffer.

Here is an example contract for a construction project.

Party A indemnifies Party B against loss, damage, liabilities, or expenses for work done on the contract.

This means even though party B is responsible for any negligence. Party B is not liable for compensating party A for liability for the action.

What Circumstances May Lead To A Request To Release Cargo Without The Production Of The Original Bill(S)?

They include:

• If the sale contract between the seller and the buyer has elapsed and the seller wants to sell goods to someone else.
• When the consignee has a financial dispute with the shipper, indemnity may apply.
• Also, getting cargo out of the port quicker saves on additional fees while waiting for the BOL.
• The receiver may aim to steal the cargo while the seller and the bank retain the original paperwork.

This is a rare occurrence.

What Are The Considerations Of A Sound Letter Of Indemnity?

A sound indemnity must contain the following qualities:

• The entity requesting the indemnity needs to be backed up with a first-class bank, mutual association, or insurance company.
• Adequate undertaking value that is not less than 200% of Cost Insurance and Freight (CIF) price of goods.
• Indemnity for all claims and costs in association with issuing a duplicate bill.
• Validity for at least as long as minimum period for legal actions under contact in the relevant jurisdiction.
• An effective law and jurisdiction clause to implement the indemnity will also apply for an indemnity letter.

PS: It is advisable to check with the shipper whether payment has been made to release goods.

Never in any circumstance accept a ‘guarantee’ signed by the importer alone.

Instead, secure a legal position and secure a full bank guarantee or letter of indemnity to be safe.

What Are The Two Types Of Letters Of Indemnity?

There are two different letters of indemnity:

• Letter of indemnity for non-quantitative clauses.
• Letter of indemnity for quantitative clauses

 Is A Letter Of Indemnity A Legal Document?

Yes, it is.

It’s a legal document that assures one party against another from any potential financial loss.

It’s only considered legally enforced only when it’s issued for legal actions.

What Are The Types Of Indemnity?

There are three types of indemnity clause which includes:

Broad Form Indemnity

The Indemnitor is required to pay for his liabilities and indemnitee’s liabilities whether the indemnitee is partially or 100% at fault.

The contract contains the phrase ‘. whole or in part.’

means if the indemnitee was responsible for 1%, 80%, or 100% of the incident that caused the loss or damage.

The Indemnitor must pay the full value of liabilities regardless of who was at fault.

Intermediate Form Indemnity

It is kind of similar to the broad form.

The Indemnitor pays for the indemnitee’s negligence as long as the indemnitee is not 100% negligent.

If the indemnitee is 99.99% negligent and the Indemnitor is 0.01% negligent, the Indemnitor pays for the liabilities.

Also, the indemnitee and their negligence will pay the liability.

The Indemnitor will not pay for only when the indemnitee is 100% negligent. The phrase used here is ‘. caused in part.’

Limited Form Indemnity

It’s also called comparative.

Here everyone is responsible for their negligence.

I pay for my own; you pay for your negligence.

For example, if a contractor (Indemnitor) is 60% negligent and the owner(indemnitee) is 40%. The contractor pays 60% of the liability cost and the owner 40%.

Ideally, this is not a form of indemnity because neither party pays for the liability of the other even though it seems to be fair.

Who Issues Letters Of Indemnity?

A letter of indemnity is drafted and issued by a third-party institution, preferably a bank or insurance carrier.

He agrees to compensate either party that suffers financial losses caused by the failure of another party.

Who Pays For An Indemnity Policy In Shipping?

The Indemnitor pays for the policy.

What Are The Parts Of A Letter OF Indemnity?

A letter of indemnity should include the following:

• Details of both parties involved in their full legal names and official or residential address with pin codes.
• Name and affiliation of the third party.
• Signature of both parties.
• A detailed description of items and their intention
• The date of when the contract will be executed

Should I Sign An Indemnification Clause In Shipping?

We don’t like reading contracts. We are victims of signing contracts or saying ‘yes’ to terms and conditions that we haven’t gone through.

Depending on the type of indemnity you have selected, you take responsibility for your negligence.

Some contracts require you to take total responsibility for all kinds for all reasons. Before signing the letter of indemnity, check the following words:

• All
• Or any
• Every
• No matter what
• Regardless of cause

Beware that even well-interpreted insurance policies won’t protect you or your vendor if you sign such an agreement.

Meaning if you sign such a contract, you will be taking full individual responsibility for incurred losses.

No insurance company or bank will help you.

Contracts are very risky and sensitive. Read through them before signing.

Nonetheless, you can only sign such a contract if it’s a binding contract that you cannot modify or negotiate for changes.

What Are The Risks Of Accepting A Letter Of Indemnity?

The following are the risks you may encounter for accepting an LOI. They include:

• An LOI is as valuable as the person granting it.

Even if it’s a bank or an insurer, it’s vital to consider whether the grantor has the necessary finances available.

Just in case an LOI is called upon or whether there are long-term risks associated.

Consider whether the grantor will still be in business. When an LOI has relied on several years to come or if there is a possibility they will be bankrupt.

Are they reliable or trustworthy entities? Do they have a good reputation? These are factors you should consider.

• An LOI phrase may not be indisputable. Words should be considered carefully against the circumstance.
• An LOI in support of an illegal act may not be enforceable.

How Can I Manage The Risk Of Accepting An Letter Of Indemnity?

If you accept an LOI, consider the following risk management tips:

• Verify LOI is addressed to the right party.
• Have LOI counter-secured by a reliable bank.
• Perform financial due diligence on the party granting. The LOI says the bank in terms of the assets they have and the actual location of the assets.
• Use the most recent International Group Wordings on your LOI.
• Ensure the LOI is broad enough to cover all liabilities, costs, and losses you may incur.
• In case there is a chain of LOI, ensure wording appears back to back.
• Ensure the recipient is the party named in the LOI. You can even go to the extent of asking for their identity and keep a copy as evidence.
• Ensure LOI is signed by the entity authorized to sign on behalf of the grantor.
• Avoid having a time limit on LOI. If not, ensure the expiry date is long enough for the provision.

What Are The Rights Of An Indemnity Holder?

On this contract, every entity has its rights. Here are the indemnity holder’s rights.

• The indemnity holder is entitled to reclaim from the promise and indemnifier all damages. For which he may be forced to pay in any suit.

Any matter to which the promise, the indemnity applies while acting within the scope of his authority, you should sign the indemnity.

• The indemnity is entitled to recover from promisor all costs he may be forced to pay in suit to defend it.

Suppose he does not go against the order of the promisor. He has acted in the absence of any contract as would have been prudent for him to do.

• An indemnity holder is entitled to recover from indemnified all sums he paid under the term of compromise of any suit.

If compromise was not against the order of the promisor and the compromiser was not against the order of the promisor.

The compromise was such that it was to be done (prudent) in the absence of any contract of indemnity.

Is It Possible To Limit An Indemnity in LOI?

Absolutely!

For instance, parties can decide to limit the duration of indemnification provision.

Many purchase agreement warranty survives 18 months after closing. Some fundamentals can be excluded for the contract to last for a longer period.

How Do I Write A Letter Of Indemnity?

You may wonder why you need to write an actual letter instead of just having a discussion. Remember, a letter can be used for future reference to suing the other party if they fail to meet the obligation.

Verbal promises cannot be used as evidence in court.

Below are steps on how to write an LOI:

• The first thing first includes the date the document is being signed.

Have your title in bold as ‘letter of indemnity to state the intention of the document clearly.

• Include a statement indicating where the agreement would be taken to court.
• Start the letter by verifying you have initiated a contract with the other party. Add phrases like ‘we agreed on.’. Remember to mention you accepted the terms of the contract.
• Insert language ‘for goods and valuable consideration.’ This wording clearly states that there is payment by one party in return for an agreement to hold the other party harmless.

In the contract, both parties must give something valuable or money in exchange for the promise.

• Explain a scenario that may make you not complete the contract. It doesn’t have to be detailed; use simple sentences.
• Describe what you are capable of doing to ensure the other party doesn’t suffer losses. Offer alternatives if possible.
• Emphasize your commitment to ensuring the other party will not have to suffer any loss. In case you are not able to fulfill your contract.

PS: Please don’t be tempted to write the contract on your own. Or use the free contact form to write because the language might not be detailed.

If possible, consult an attorney to assist you with the form.

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