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What Is a Letter of Indemnity?

Letters of indemnity are sometimes exchanged when people enter into contractual obligation in order to protect one or both parties from losses.
A letter of indemnity is also known as an affidavit of loss.
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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 30 August 2014
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The term “letter of indemnity” can appear in two different legal senses. The most common meaning is to refer to a letter that is designed to protect a party to a contract from losses. In the second sense, it's a documentation of a loss submitted for the purpose of receiving compensation or a replacement. The meaning intended is usually clear from the context when the term is used.

Letters of indemnity are sometimes exchanged when people enter into contractual obligations. According to the letter, if one party fails to fulfill a contract, it agrees to compensate the other party. The purpose of the letter is to reduce risk in a contract and associated transactions by ensuring that there is already a process in place for recovering compensation in the event of a breach. Such letters can also be provided by a third party as an assurance.

For the person agreeing to perform or provide compensation, a letter of indemnity can be a significant risk. There are certain situations that might make it hard to fulfill a contract, but would be difficult to predict ahead of time. If one of these situations arises and that party is forced to break the contract, he or she will still be responsible. As a result, such letters are drafted with care and are not used lightly.

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In the second sense, the letter is typically used to document the loss of securities for the purpose of requesting replacements. Also known as an affidavit of loss, such a document is sent to the issuer for the purpose of demonstrating that a loss occurred and indicating that the securities are not recoverable. The person will have to provide as much documentation as possible to prove ownership and provide information about the securities, such as their registration numbers.

When a letter of indemnity is received, the issuer reviews it and determines whether or not the claim is valid. If it is, replacements are sent out. In the event that the originals resurface, the owner may be asked to destroy them or to send them to the issuer for destruction. Keeping securities in a secured place and maintaining up to date documentation on them is extremely important. Using a safe deposit box at a bank or a broker's safe to store securities can be recommended to limit the possibilities of a loss.

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anon270281
Post 4

Can a letter of indemnity protect a party from claims if damages are already known? (example a subcontractor knowingly uses substandard board in a weight bearing situation but provides a letter of indemnity to the main builder for any damages that might occur; both the subcontractor/main builder know that this will collapse under weight but it has not happened yet). Is the indemnity valid?

indemnifyme
Post 3

@KaBoom - Yes, liability insurance could cover a person being sued over a letter of indemnity. If it was a business contract then usually the liability portion of the persons business insurance will cover it. In other cases the liability coverage in a persons homeowners insurance may come into play.

KaBoom
Post 2

@indemnifyme - A letter of indemnity sounds very serious. If a person was sued over the letter and had to pay money to another person would their insurance cover that?

indemnifyme
Post 1

Indemnity is a very important principle in insurance. Usually this means that if a loss occurs the insurance company will restore the customer to the same state they were in before the loss. This is why if, for example, you wreck your car the insurance company won't pay out more than the car was worth.

The same principle applies to an indemnity clause on a contract. Basically the clause works to restore both parties to the condition they would be in if the contract is fulfilled. It seems reasonable but one should be careful when signing such a thing because it is legally binding!

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