The term “letter of indemnity” can appear in two different legal senses. The most common meaning is to refer to a letter that is designed to protect a party to a contract from losses. In the second sense, it's a documentation of a loss submitted for the purpose of receiving compensation or a replacement. The meaning intended is usually clear from the context when the term is used.
Letters of indemnity are sometimes exchanged when people enter into contractual obligations. According to the letter, if one party fails to fulfill a contract, it agrees to compensate the other party. The purpose of the letter is to reduce risk in a contract and associated transactions by ensuring that there is already a process in place for recovering compensation in the event of a breach. Such letters can also be provided by a third party as an assurance.
For the person agreeing to perform or provide compensation, a letter of indemnity can be a significant risk. There are certain situations that might make it hard to fulfill a contract, but would be difficult to predict ahead of time. If one of these situations arises and that party is forced to break the contract, he or she will still be responsible. As a result, such letters are drafted with care and are not used lightly.
In the second sense, the letter is typically used to document the loss of securities for the purpose of requesting replacements. Also known as an affidavit of loss, such a document is sent to the issuer for the purpose of demonstrating that a loss occurred and indicating that the securities are not recoverable. The person will have to provide as much documentation as possible to prove ownership and provide information about the securities, such as their registration numbers.
When a letter of indemnity is received, the issuer reviews it and determines whether or not the claim is valid. If it is, replacements are sent out. In the event that the originals resurface, the owner may be asked to destroy them or to send them to the issuer for destruction. Keeping securities in a secured place and maintaining up to date documentation on them is extremely important. Using a safe deposit box at a bank or a broker's safe to store securities can be recommended to limit the possibilities of a loss.
