Risks of Letter of Indemnity (LOI)

As well as the risk that an Letter of Indemnity (LOI) will be an illegal contract and thus unenforceable, the beneficiary of an Letter of Indemnity (LOI) runs other risks:

• The creditworthiness of the Letter of Indemnity (LOI) provider: it is possible that the Letter of Indemnity (LOI) beneficiary will not have an opportunity to examine the creditworthiness of the Letter of Indemnity (LOI) provider. Even if beneficiary examine the creditworthiness, that is no guarantee that the Letter of Indemnity (LOI) provider will be able to pay. In a case of discharge without production of Bills of Lading (B/L), the goods may be worth millions of dollars. The beneficiary may then find out that the reason the Bills of Lading (B/L) were not collected by the Letter of Indemnity (LOI) provider was that he did not have funds to pay for the goods. Letter of Indemnity (LOI) provider will not then be able to pay the beneficiary, even if he is liable to under the Letter of Indemnity (LOI).

• The Letter of Indemnity (LOI) providers may argue that the Beneficiaries’ Losses would have occurred anyway and did not occur as a result of doing what the Letter of Indemnity (LOI) provider asked.

• Some Protection and Indemnity Clubs (P&I Clubs) consider the acceptance of any Letter of Indemnity (LOI), even an enforceable Letter of Indemnity (LOI), to be a breach of their rules and they may cancel their Protection and Indemnity Cover (P&I Cover). Thus, an owner may lose Protection and Indemnity Cover (P&I Cover) for crew claims, cargo damage etc. unconnected with the circumstances of the Letter of Indemnity (LOI).