What is a letter of indemnity (banking)?


What is a letter of indemnity (banking)?

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It is a document that guarantees how some provision will be satisfied if one of the two parties in a contract fails to meet an obligation. It ensures that one party won’t suffer losses if the other party fails to fulfill the contract.

So, for example, let’s say that you are contracting with a moving company to move something exceptionally valuable and you are concerned that if the moving company damages the item in transit, they will be unable to pay you the value of the damaged item. You could request an LOI from the moving company’s insurance to prove that they have adequate insurance to cover losses and that the insurance company will pay out in full in the case of damage.

In another example, you could also see an LOI used to insulate one party in the contract from future damages. Let’s say that you hire a contractor to install wood flooring in your home. The contractor discovers that the specific wood you requested is not available. The contractor could issue you an LOI in which they promise to find an alternate, acceptable wood or return any funds paid and cancel the contract. This would establish that you won’t pay for the consequences of the original wood being unavailable.