Letter of Indemnity

Reviewed by Vineeth | Updated on Aug 27, 2020

Introduction to Letter of Indemnity

A letter of indemnity is often referred to as an LOI. It is a document used to enter a contract which ensures some terms are met between the parties entering the contract. Typically, these letters are prepared and drafted by a third-party institution, such as banks and insurers, who agree to compensate either of the party when the other party fails to meet the terms of the contract.

In simple words, the primary objective of a letter of indemnity is to make sure that both parties involved in a contract meet all the requirements so as to avoid losses to both the parties involved in a transaction. The idea of indemnity is derived from avoiding losses on account of someone else committing a mistake.

A letter of indemnity will contain detailed steps of measures to prevent the party that has been right during the transaction mentioned in the contract.

Understanding Letter of Indemnity

Letters of indemnity state that all loses that are resulting from party A to party B should be borne by the party A by taking all due responsibilities in compensating for the losses resulting due to his position of not being able to meet the terms of the contract, as facilitated by a third party.

In this way, the terms of letters of indemnity are comparable with the clause mentioned in the insurance policies. Letters of indemnity are utilised for several kinds of business transactions.

Parts of LOI

A letter of indemnity must mention the details of both the parties involved in the transaction. These details are, generally, full legal name and complete official or residential address with pin code. Also, the affiliation and name of the third party involved in the contract will also be mentioned in the letter of indemnity.

Furthermore, a detailed specification of the parts and goals of the agreement being executed will be indicated on the LOI. Signature of both the parties and the date of execution of the contract will be mentioned in the bond.