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What is a letter of indemnity (LOI) in export: Purpose, working, example, and how to get one
A letter of indemnity is a legal agreement that protects parties in a contract from losses, usually backed by a bank or insurer. Learn more about it in the blog.
Delays, missing documents, or sudden disputes can disrupt export shipments and cost businesses valuable time and money. This is where a letter of indemnity (LOI) becomes essential in global trade. In simple terms, a letter of indemnity is a legal document which protects parties involved from potential losses or damages. This blog explains the role of LOI in export transactions, including how it works, with a practical example.
What is a letter of indemnity (LOI)?
A letter of indemnity (LOI) is a legal agreement that protects one or both parties in a contract from losses if the other party fails to meet their obligations. This protection is provided by a third party, like banks or insurance companies. The third party insures the agreement, taking on responsibility for any losses or damages, so the parties involved are shielded from liability. LOIs are used in many business transactions, including global trade, loans, and corporate mergers.1
Purpose of letter of indemnity (LOI)
A letter of indemnity serves the following key purposes in international trade:
● Protects against financial loss: An LOI ensures that one or both parties in a contract are protected from financial losses if the other party fails to meet their obligations.
● Builds trust and confidence: By involving a third party, an LOI helps build trust and confidence between the contracting parties, as they know there is a safety net in place.
● Reduces liability risks: An LOI reduces the risk of liability for the parties involved, as the third party assumes responsibility for any potential losses or damages.2
Who issues a letter of indemnity?
Typically, third-party organizations such as banks or insurance firms issue LOIs, promising to reimburse one party financially in the event that the other party defaults on its duties.3
How to obtain a letter of indemnity?
A financial institution typically drafts and prepares LOIs. The party that guarantees a transaction can be either an insurance company or a bank. Traders can obtain letters of indemnity from banks, insurance companies, or other providers.4
How does a letter of indemnity (LOI) work?
A letter of indemnity works as a safeguard for transactions where shipping documents are incomplete, delayed, or missing. In export trade, especially with containerized cargo, original bills of lading often take longer to reach the consignee than the cargo itself. To prevent unnecessary port demurrage or delays, carriers may agree to release goods against a valid LOI. Here is a broad overview of how this works:
Step 1: Identification of issue
The exporter or consignee identifies a delay or risk — such as a missing bill of lading — that prevents smooth cargo release.
Step 2: Drafting the LOI
The party concerned (shipper, consignee, or charterer) prepares a letter of indemnity format with all required details, including parties’ names, cargo description, liabilities, and governing law.
Step 3: Issuance and signing
The LOI is signed by the requesting party, often backed by a bank or insurance company to increase credibility.
Step 4: Submission to carrier
The carrier or shipping line receives the LOI and, upon accepting it, agrees to release the goods or take the requested action.
Step 5: Legal enforceability
If disputes or losses occur later, the party issuing the LOI must compensate the carrier or counterparty as per agreed terms.5
Letter of indemnity (LOI) example
Let us consider an Indian textile exporter shipping garments to a buyer in the UK. The cargo arrives at the destination port, but the original bill of lading has not yet reached the buyer. As the carrier cannot release the goods without this document, the buyer requests delivery against a Letter of Indemnity (LOI) to avoid demurrage and storage charges.
The LOI, typically issued by the buyer and sometimes supported by the exporter or a bank, assures the carrier that it will be indemnified against any future claim should the original bill of lading be presented by another party. This allows the carrier to release the goods while protecting itself from legal or financial liability, ensuring timely delivery and minimising additional costs.6
The LOI, typically issued by the buyer and sometimes supported by the exporter or a bank, assures the carrier that it will be indemnified against any future claim should the original bill of lading be presented by another party. This allows the carrier to release the goods while protecting itself from legal or financial liability, ensuring timely delivery and minimising additional costs.6
Contents of letter of indemnity
The letter of indemnity format varies depending on jurisdiction and trade requirements, but generally includes:
● Full names and addresses of parties involved.
● Detailed description of cargo (type, weight, quantity, marks, etc.).
● Voyage details such as vessel name, port of loading, and port of discharge.
● Reason for issuing the LOI (e.g., missing bill of lading).
● Clear indemnity clause holding the carrier harmless.
● Validity period and applicable governing law.
● Signatures of authorized representatives, often with bank countersign.7
Format of letter of indemnity
Here is a sample format of a letter of indemnity document:
How to fill a letter of indemnity?
Some essential points that need to be filled in a letter of indemnity are as follows:
● The parties’ names and addresses.
● The third party’s name and association.
● A description of the goods being sent or the purpose of the LOI.
● The date the contract was signed, and the signatures of the parties.
How to write a letter of indemnity?
Exporters or consignees must draft an LOI carefully since it carries legal implications. The key steps are:
Step 1: Identify the requirement
Determine why the LOI is needed — missing documents, early cargo release, special handling, etc.
Step 2: Use a standard format
Adopt an accepted letter of indemnity format used in international shipping, ensuring inclusion of all mandatory details.
Step 3: Include indemnity clause
Clearly state that the issuing party indemnifies the carrier against claims, damages, or losses.
Step 4: Add governing law
Specify the legal framework under which disputes will be resolved, often English law or Indian law for local exporters.
Step 5: Sign and secure backing
Ensure the LOI is signed by an authorized person, preferably supported by a bank guarantee for credibility.9
Letter of indemnity (LOI) vs bill of lading (BOL)
Aspect
Bill of lading
Letter of indemnity
Definition
A legal document outlining the terms for transporting goods between the shipper and the carrier.
A legal agreement that protects one or both parties in a contract from losses if obligations are not met.
Purpose
Serves as a receipt and record of goods shipped.
Provides financial protection and mitigates risks.
Function
Tracks and documents the movement of goods during transportation.
Compensates for losses or damages if one party fails to fulfill contractual terms.
Parties involved
Shipper and carrier.
Contracting parties, with protection often supported by banks or insurance companies.10
Letter of indemnity (LOI) vs bank guarantee
Aspect
Bank guarantee
Letter of indemnity
Definition
A financial instrument where a bank commits to pay if the guaranteed party fails to meet contractual or payment obligations.
A legal document in which one party promises to compensate another for losses arising from specific actions or omissions.
Purpose
Ensures payment or performance in case of default under a contract.
Holds another party harmless from losses, often in specific transactional scenarios (e.g., releasing goods without original documents).
Nature of risk coverage
Provides broader, contractual risk coverage across obligations.
Covers specific, situational risks within a transaction.
Enforceability
Highly enforceable due to the bank’s financial strength, regulation, and legal oversight.
Based on the credibility of the issuing party, it may be less legally enforceable compared to a bank-backed instrument.
Scope of use
Used widely in trade finance, construction, and large-scale project contracts.
Covers specific, situational risks within a transaction.11
Conclusion
A letter of indemnity is an essential instrument in global shipping that helps mitigate risks when documentation is incomplete. It enables exporters and importers to avoid costly delays, ensures carriers are protected, and keeps supply chains moving efficiently. While its day-to-day use is more common in advanced shipping markets like the US or Europe, Indian exporters engaged in cross-border transactions must also be aware of the significance of an LOI in shipping and its practical application.
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Frequently Asked Questions
1. What is a letter of indemnity bond?
A letter of indemnity bond is a financial guarantee that protects against potential losses or damages if contractual obligations are not met. It involves a third party, typically a bank or insurer, ensuring compensation for any losses incurred.
2. Why is a letter of indemnity required?
A letter of indemnity is required in international trade to protect parties from financial losses if the other party fails to fulfill their contractual obligations. It provides assurance and mitigates risks, ensuring smooth and secure international transactions.
3. What are the risks of a letter of indemnity?
A letter of indemnity (LOI) is designed to manage risks but using one can also introduce certain risks. For an LOI to be legally enforceable, it must be properly executed, clearly defining what is covered and specifying the obligations of all parties. The effectiveness and enforceability of an LOI depends on its precise wording and the jurisdiction in which it is executed.
4. What is the difference between a letter of undertaking and a letter of indemnity?
A letter of undertaking (LUT) is a written commitment by a financial institution to meet a client's obligation to a trading partner if the client defaults on payment. In contrast, a letter of indemnity (LOI) is a legal agreement that protects one or both parties in a contract from losses if the other party fails to fulfill their obligations, with protection provided by a third party like banks or insurance companies.
5. What is a letter of indemnity insurance?
Letter of indemnity insurance is a policy that protects against financial losses if contract terms are not fulfilled, with an insurer guaranteeing compensation for any losses incurred.
6. Who signs a letter of indemnity?
All LOIs must be signed by a witness. However, when dealing with costly assets, it is better to have a banker, insurance carrier representative, or other professional sign the document rather than just a witness.
7. What is the need for a letter of indemnity?
A letter of indemnity is needed in export trade when critical documents like the bill of lading are delayed or missing. It allows carriers to release goods without original paperwork, while protecting them against legal or financial claims.
Published on July 10, 2024.
Updated on November 13, 2025.
Sources:
1. https://cleartax.in/glossary/letter-of-indemnity
2. https://www.credlix.com/blogs/all-about-letter-of-indemnity-its-meaning-process-sample-format-and-more
3. https://windward.ai/glossary/what-is-a-letter-of-indemnity/
4. https://www.dripcapital.com/resources/blog/letter-of-indemnity
5. https://www.credlix.com/blogs/all-about-letter-of-indemnity-its-meaning-process-sample-format-and-more
6. https://www.investopedia.com/terms/l/letterofindemnity.asp#toc-practical-examples-of-letters-of-indemnity-in-use
7. https://windward.ai/glossary/what-is-a-letter-of-indemnity/
8. https://www.credlix.com/blogs/all-about-letter-of-indemnity-its-meaning-process-sample-format-and-more
9. https://www.credlix.com/blogs/all-about-letter-of-indemnity-its-meaning-process-sample-format-and-more
10. https://britanniapandi.com/2024/11/bills-of-lading-and-letters-of-indeminty-common-problems-and-best-practice-for-masters/
11. https://www.tradefinanceglobal.com/legal/guarantees-indemnities/
Updated on November 13, 2025.
Sources:
1. https://cleartax.in/glossary/letter-of-indemnity
2. https://www.credlix.com/blogs/all-about-letter-of-indemnity-its-meaning-process-sample-format-and-more
3. https://windward.ai/glossary/what-is-a-letter-of-indemnity/
4. https://www.dripcapital.com/resources/blog/letter-of-indemnity
5. https://www.credlix.com/blogs/all-about-letter-of-indemnity-its-meaning-process-sample-format-and-more
6. https://www.investopedia.com/terms/l/letterofindemnity.asp#toc-practical-examples-of-letters-of-indemnity-in-use
7. https://windward.ai/glossary/what-is-a-letter-of-indemnity/
8. https://www.credlix.com/blogs/all-about-letter-of-indemnity-its-meaning-process-sample-format-and-more
9. https://www.credlix.com/blogs/all-about-letter-of-indemnity-its-meaning-process-sample-format-and-more
10. https://britanniapandi.com/2024/11/bills-of-lading-and-letters-of-indeminty-common-problems-and-best-practice-for-masters/
11. https://www.tradefinanceglobal.com/legal/guarantees-indemnities/
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