A contractual agreement comes with different rules and guidelines that cater to the need of both parties as required. During the contract phase, documents are shuffled to and fro, with letters sent across too. However, this also does not stop even after the contract is in place, and one good time it happens again is when there is a breach. The letter of indemnity (LOI) is one of these documents that are exchanged between two parties who have a binding contract. It guarantees certain conditions beforehand and stands as evidence when they are not.
What is a letter of indemnity?
A letter of indemnity is usually drafted by a third party institution and stands as an agreement to provide financial compensation to one party if the second party does not fulfil its obligation. Therefore, its presence is to ensure that the liable party would not suffer any losses even if the other party does not meet up. Essentially, a letter of indemnity is a contract document that exists to guarantee certain provisions (mostly financial), in case of losses to one party. This letter usually carries all the details of the contractual agreement and suitable compensation based on events or losses.
An in-depth look at a letter of indemnity
A letter of indemnity is very similar to indemnity clauses mostly seen in an insurance contract. It states that the damages incurred by a certain party, caused by another, would be compensated for by a third party. Hence, this is basically the backbone of how an insurance contract works, although it has other uses asides from insurance. We could refer to a letter of indemnity as bonds of indemnity or indemnity bonds. This means it’s legally binding and its obligations have to be fulfilled.
Letters of indemnity have very wide use, especially by companies for different business transactions to mitigate risks. For example, just like insurance, when a second party transports valuable items. An LOI ensures the owners of the goods would be compensated in case something goes wrong. However, the specific case of what went wrong must be captured in the agreement or the company does not compensate for it. Most times, it covers damages in transit, loss of possession, and theft.
Another situation where the letter of indemnity works outside insurance is in the borrower-lender agreement. For instance, if party A comes to borrow a car from party B. Party B could offer a letter of indemnity to A, ensuring that whatever happens to the car during that time is the sole responsibility of the borrower. Also, this happens with using other rentals, buildings and the likes. In such a situation, the borrower must repair any damages the asset incurred during use.
Lastly, it is necessary to have a witness sign the letter of indemnity. Depending on the situation, some even prefer to have insurance personnel or a professional banker for strong legal reasons.
What are the necessary requirements contained in a letter of indemnity?
A letter of indemnity should include the following:
- Names and addresses of both parties
- Name and affiliation of the third party
- A detailed description of the terms and conditions of the agreement
- Signatures of all parties
- Date of contracts execution
A letter of indemnity has several uses across the business world today. Primarily, it protects a party in a contract agreement, with respect to the details of the agreement itself. Ultimately, it exists to curtai financiall losses.