What is a Letter of Indemnity?

A letter of indemnity, or indemnity bond, functions similarly to insurance. One party secures a letter of indemnity from a bank to provide to another party with whom they will undertake a transaction. If the party securing the letter of indemnity fails to perform its obligations to the other party, the other party can seek payment from the financial institution.  

How does a Letter of Indemnity Work?

A Letter of indemnity shields the one party to a transaction against possible consequences that may arise from the other party’s failure to perform. They are common when a party has a duty to perform construction services or transport property.