How to Write a Letter of Indemnity
A letter of indemnity is used in business transactions to assure one party that they will not suffer financial loss if the other party cannot fulfill part of the contract.
When two parties agree to a contract they both have obligations. Usually, one party agrees to pay the other party, who agrees to provide products or services. If one party breaches the contract (doesn't do what they agreed to do), the other party may suffer a loss, either losing the payment or not receiving the goods or services.
The concept of indemnity is about holding someone harmless and not having that person or business suffer a loss. A letter of indemnity is written to reassure the other party with specific measures that will hold them harmless. Since the letter is in writing, it is an additional assurance to the other party.
You might be wondering why you need to write an actual letter, rather than just talking to the person about the issue. It's important to remember that a letter of indemnity is also a written contract, which means your assurance can be taken to court if you fail to deliver on the promises made in that letter. Just talking about the issue and making verbal promises will not be enough if the other party decides to take you to court.
Examples of Letters of Indemnity
Let's say you have a painting business and you have signed a contract to paint an office building and you have already received a deposit.
Then you find out that the paint you agreed on is out of stock and there is no guarantee that the paint will be available any time soon. You could write a letter of indemnity assuring the other business that you will find acceptable paint, return their deposit, or find someone else to do the work. The letter, as noted above, is a reassurance that the customer won't suffer a loss because you couldn't fulfill your part of the bargain.
In another common example, you may agree to use a credit card to buy services for someone else. (This might happen if you buy airline tickets for someone.) The credit card company may question the transaction because it doesn't want the liability if you refuse to pay. You might need to write a letter of indemnity to the credit card company stating that you agree to pay the charges.
In another more personal example, your neighbor might want to borrow your truck to do some moving. You are concerned that the truck might be damaged or that the items being moved might be damaged and you might have liability. You could ask your neighbor to sign a letter of indemnity stating that you would be held harmless and that the neighbor would pay for all damage in case the truck or the items are damaged. (Yes, insurance might come into this example, but you might not want to have to file an insurance claim.)
When a Letter of Indemnity Might Be Needed
Often a letter of indemnity is written by a third party, often a bank or insurance company. If a business has a loss on a piece of property and the insurance company has agreed to pay the claim, the insurance company may write a letter of indemnity to the mortgage holder assuring that the insurance proceeds will go towards repair of the property.
Letters of indemnity are common in shipping. A shipment may arrive at a customer's location but no bill of lading is available to check against the list of items in the shipment. The customer may be reluctant to accept the shipment because they have no way of knowing if it's complete. A letter of indemnity would be written in this case to assure the customer that they would not suffer a loss if something is missing.
What to Include in a Letter of Indemnity
- Begin the letter confirming the contract already in place with the other party. Include the circumstances—"We agreed that ..."— and emphasize your acceptance of the terms of the contract.
- Explain what might happen to cause you not to complete the contract. You don't need to go into a lengthy explanation, just a brief sentence or two is fine.
- Describe what you will do to make sure the other party doesn't suffer a loss. Be specific. Offer alternatives.
- Emphasize that your commitment that the other party will not have to pay more or suffer any kind of loss if you can't fulfill the contract.