What Is a Letter of Indemnity (LOI)?
A letter of indemnity is a stand‑alone, one‑page undertaking—usually issued by the seller (beneficiary) and, where required, countersigned by its bank—by which the issuer:
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Asserts ownership of the goods in question.
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Indemnifies the addressee (carrier, bank or buyer) against any loss or liability arising from releasing goods without the full set of original transport documents (most commonly charter‑party bills of lading).
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Promises to hand over the missing originals as soon as they become available.
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Holds the addressee harmless from all consequences of selling or receiving the goods absent those originals
LOIs are most frequently encountered in high‑value, multi‑party commodity trades—for example, crude oil shipments—where cargo may change hands several times before the final buyer obtains the originals .
Why and When Are LOIs Used?
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Speed to market: Commodities like oil often arrive at discharge ports before all endorsed bills circulate back to the seller.
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Avoid demurrage: Port charges (demurrage) can escalate quickly if goods cannot be released due to missing originals.
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Multi‑layer trading: Intermediary brokers may not have an interest in holding cargo long enough to gather every original document.
In such cases, an LOI enables the carrier or bank to release goods immediately, alleviating storage or detention costs, with the assurance they will be shielded against any downstream claims .
Typical Contents of an LOI
Though formats vary by carrier or bank, most LOIs include:
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Reference details: LOI number, date, and underlying documentary credit number.
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Goods description: Quantity, quality and voyage/vessel details of the shipment.
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Indemnity clause: An explicit promise to reimburse any claim, cost or liability arising from releasing goods without originals.
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Surrender commitment: A pledge to deliver the complete, duly‑endorsed original charter‑party bills of lading promptly upon their arrival.
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Joint and several liability: A statement that the beneficiary—and, if countersigned, its bank—are jointly and severally liable for the indemnity amount, often without expiry or cap .
Banks’ Role and Countersigning
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Beneficiary’s LOI: Issued by the seller to the carrier or buyer.
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Bank countersignature: If the carrier insists, the issuing or advising bank adds its stamp, effectively stepping into the indemnity alongside the beneficiary.
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Risk recording: Banks typically record the LOI amount against the client’s credit facility and may demand a cash deposit or margin to cover potential exposure .
There are no ICC rules governing LOI countersigning—each bank sets its own policy on liability caps, expiry periods, fees and internal approvals .
Practical Example
Scenario:
OilCo Ltd. sells 100,000 barrels of crude oil to TraderX under DC No. DC2025‑045. The buyer’s charter‑party bills of lading have not yet been returned through endorsements when the tanker docks at Mumbai on July 5, 2025. To avoid demurrage, OilCo issues this LOI to the carrier:
Letter of Indemnity No. LOI‑2025‑089
Dated: July 5, 2025
Under DC No. DC2025‑045“We, OilCo Ltd., hereby confirm our ownership of the cargo described as 100,000 barrels of crude oil, carried on MV Ocean Star (Voyage OS1234). We undertake to indemnify and hold harmless [Carrier Name] against any and all claims, demands, liabilities or charges arising from releasing said cargo without presentation of the original charter‑party bills of lading. We further undertake to surrender the full set of such bills to you immediately upon receipt. This indemnity shall be joint and several, unlimited in amount and without expiry date.”
Signed,
OilCo Ltd.
Countersigned by BankCorp PLC (if required)
Once presented, the carrier releases the oil to TraderX, confident that any holder of the original bills later seeking recourse will be met by OilCo (and BankCorp), per the LOI terms.
Key Risks and Best Practices
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Unlimited liability: Many LOIs carry no cap or expiry—banks and beneficiaries must understand potential open‑ended exposure.
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Statute of limitations: Local laws may impose expiry periods (e.g., 6–7 years in some jurisdictions), but these vary.
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Document control: As LOIs circumvent standard UCP 600 rules on documents, banks should carefully assess the client’s creditworthiness and require appropriate security or cash cover.
