A letter of indemnity (LOI) is a written guarantee where one party promises to compensate another for any losses, damages, or liabilities arising from a specific transaction. It is essentially saying: "If something goes wrong because of me, I will cover your losses."
In banking and trade, LOIs are commonly used when original shipping documents are delayed. A buyer needs to collect goods from the port, but the bill of lading has not arrived yet. The buyer's bank issues an LOI to the shipping company, guaranteeing coverage if the original documents reveal a discrepancy.
LOIs are also used in securities trading, insurance claims, and corporate transactions. However, they carry risk — an LOI is only as good as the financial strength of the party issuing it. Banks carefully evaluate whether the issuer can actually honor the indemnity before accepting one.