Letter of Indemnity (LOI)

A Letter of Indemnity (LOI) is a written guarantee from one party to another, promising to compensate for potential losses arising from a specific transaction or situation. In shipping and trade, LOIs appear most frequently when an original bill of lading is unavailable at the time the consignee needs to collect cargo at the destination port. The LOI substitutes for the missing document by assuring the carrier that the party requesting release of the goods will cover any resulting losses or claims.

The Most Common Use: Releasing Cargo Without the Original B/L

Ocean cargo sometimes arrives at the destination port before the original bill of lading reaches the consignee. This happens when transit times are short (a 5-day sailing from Busan to Long Beach may not leave enough time for original documents to travel by courier from Korea) or when banking channels processing a letter of credit are slow in releasing the originals.

Without the original bill of lading, the carrier technically cannot release the cargo. The bill of lading is a document of title, and the carrier’s obligation is to deliver goods only to the party presenting the original. But cargo sitting at the port incurs demurrage, storage fees, and supply chain delays. The LOI resolves this impasse: the consignee (or the shipper, or the consignee’s bank) issues an LOI to the carrier, guaranteeing that the carrier will be held harmless if releasing the cargo without the original bill of lading results in a claim from a third party.

What an LOI Contains

A standard LOI for cargo release includes the vessel name and voyage number, the bill of lading number, a description of the goods, the port of loading and port of discharge, the name of the party requesting release, a statement that the requesting party will indemnify the carrier against all claims, losses, damages, and legal costs, and the signature of an authorized officer of the requesting company. Banks sometimes countersign the LOI to add financial weight to the guarantee, though this practice varies by carrier and transaction.

LOIs in Other Shipping Contexts

Beyond cargo release, LOIs appear in several other situations.

Clean bill of lading issuance: When cargo has visible damage or packaging deficiencies at the time of loading, the carrier would normally issue a “claused” or “foul” bill of lading noting the damage. This can cause problems with letter of credit transactions, which typically require a clean bill of lading. The shipper may issue an LOI to the carrier, promising to indemnify the carrier for any claims arising from issuing a clean bill of lading despite the noted discrepancies. This practice is legally risky for both parties and is not enforceable against third parties with legitimate claims.

Switching bills of lading: In commodity trading, cargoes may be resold multiple times during the ocean voyage. Each resale may require a new bill of lading reflecting the new buyer. The original shipper provides an LOI to the carrier authorizing the switch and indemnifying the carrier against claims related to the original bill of lading.

Delivery to a different party: If the consignee on the bill of lading directs the carrier to deliver the goods to a third party not named on the document, an LOI covers the carrier’s exposure in making that delivery.

Legal Standing of LOIs

LOIs are contractual agreements between the issuing party and the carrier. They do not have standing against third parties. If a bank holds the original bill of lading as security for a letter of credit and the carrier releases cargo to the consignee based on an LOI, the bank can still pursue a claim against the carrier. The carrier’s recourse is then to claim against the party that issued the LOI. This chain of liability is why carriers carefully evaluate who is issuing the LOI and whether that party has the financial capacity to honor the indemnity.

P&I Clubs (Protection and Indemnity insurance providers for ship owners) generally advise their members to accept LOIs only from reputable parties with verifiable financial standing. An LOI from a shell company with no assets offers no real protection.