What is a letter of indemnity?
A letter of indemnity (LI) is a contractual document guaranteeing compliance with certain provisions between two parties. These letters are traditionally written by third party institutions such as banks or insurance companies, who agree to pay a financial refund to one of the parties, if the other party fails to meet its obligations. In other words, the main function of a letter of intent is to ensure that party A will not suffer losses in the event of default by party B. The concept of compensation relates to the guarantee of someone’s liability, and a letter of indemnity describes the specific measures that will be used to protect a party.
Understanding letters of indemnity
A letter of indemnity stipulates that any damage caused by the first party to the second party, or to the personal effects of the second party, is the responsibility and is facilitated by the third party, in accordance with the contractual agreement. In this sense, letters of intent, often called “indemnity obligations” or “indemnification obligations”, are similar to insurance policies.
Letters of indemnity are used in various types of business transactions. In cases where valuables are transported by third parties, such as moving companies or delivery services, letters of intent guarantee compensation to the person who holds the valuables if their property is lost, damaged or stolen during transport. Letters of intent are generally signed when the valuables in question are presented to the recipient, before a bill of lading, which is a document issued by a carrier, acknowledging receipt of the cargo.
Indemnification letters can also be used when a second party borrows something of value from the first party, such as a car or power tool. In this case, the first party (the owner) may present to the second party (the borrower) a letter of indemnity stating that any damage is the sole responsibility of the borrower. Letters of intent should always be signed by a witness, but in cases involving items of excessive value, it is best to have the document signed by an insurance company representative, banker, or other professional agent at place of a simple witness.
Requirements for a letter of indemnity
Letters of indemnity must include the names and addresses of the two parties concerned, as well as the name and affiliation of the third party. Detailed descriptions of the items and intentions are also required, as well as the signatures of the parties and the date of performance of the contract.
Example of letter of indemnity
Let’s say you hire a professional painter to paint your house. You sign a contract with them to paint your house using a specific brand, color and type of paint. However, after signing the contract and the agreed conditions, the painter discovers that the specific type of paint has been abandoned. The painter can write you a letter of indemnity, in which he promises you to obtain an acceptable painting, or returns your deposit and terminates the contract. The letter of indemnity establishes that you will not pay the consequences of the painter’s inability to fulfill his part of the contract.