What is a 'Letter Of Indemnity'

A letter of indemnity is a letter guaranteeing contractual provisions will be met, otherwise financial reparations will be made. The principle behind a letter of indemnity is the guarantee that losses will not be suffered if certain provisions of a contract are not met. It can also be a letter requesting replacements for lost shares from a company's treasury.

BREAKING DOWN 'Letter Of Indemnity'

A letter of indemnity is a written confirmation from a third party, typically a bank or insurance company, acting on behalf of the first party in the contract. The letter states that any damages caused by the first party to the second party, or to the second party's belongings, are the responsibility of and are handled by the third party as per the contractual agreement. In a sense, a letter of indemnity works like an insurance policy, though the terms are usually agreed upon solely between the parties involved. Letters of indemnity are also referred to as indemnity bonds or bonds of indemnity.

When Are Letters of Indemnity Used?

Letters of indemnity are used during various types of business transactions. In a case where items of value are being transported or handled by a second party, a letter of indemnity is used to ensure the party who owns the valuables will be compensated if anything happens to those items, such as being lost, damaged or stolen. This type of scenario is most commonly found when the valuable items are presented to the recipient prior to a bill of lading.

Letters of indemnity can also be used in the event a second party is borrowing something of value from the first party with intentions of using it, such as a car or power tool, and risking liability of that valuable item. The first party, or owner, can present the second party, or borrower, with a letter of indemnity stating any sort of damages are the sole responsibility of the borrower. The letter should be signed by a witness. Depending on the item or situation, the letter may be signed by a representative of an insurance carrier or a bank rather than a simple witness.

What Information Is Required on a Letter of Indemnity?

Letters of indemnity should consist of the names and addresses of the parties involved, as well as the name and affiliation of the third party. A detailed description of the items and intentions is also required, followed by signatures of the parties and the date.

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