Letter of Indemnity (LOI) in Shipping: Meaning
A letter of indemnity, or LOI, is a written promise by one party to cover the other for a loss that may come from doing something the contract does not allow.
What it is
In shipping a letter of indemnity is used when a party asks the ship operator to do something that is outside the normal rules, and promises to cover the loss or the claim if there is any. The party that gives the letter is the one that asks, and the party that receives it is the one that carries the risk of the request.
Common uses
The best known case is the release of cargo at the discharge port without the original bill of lading, because the papers are late. Other uses are the issue of a clean bill when the cargo has a small remark, or a change of the discharge port. In each case the ship operator would be at risk if it acted without protection.
Why it is a risk
An LOI is only as good as the party that gives it. If the giver cannot pay when a claim comes, the ship operator carries the loss. Insurers of the ship often do not cover the consequences of such a release, and some courts do not enforce a letter that is meant to hide a fact from a third party. Many ship operators refuse an LOI or ask for a bank to back it.
What a good letter says
It names the ship, the voyage and the cargo, states exactly what is requested, promises to cover all losses, costs and legal fees, and says when the promise ends, for example when the original document is delivered. It is signed by a person who is authorised to bind the company, and in some cases it is countersigned by a bank. The wording is usually fixed by a standard form that the ship operator's insurer recommends.
Before you use one
Ask a maritime lawyer and your insurer. This page is general information, not legal advice. See also the guide on shipping bulk cargo and the charter party.
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