Letter of Indemnity

A Letter of Indemnity (LOI) is a written promise by a cargo interest to indemnify the shipowner or carrier for any liability arising from an action the carrier would not otherwise take — most commonly, delivering cargo without production of an original bill of lading, or issuing a fresh set of B/Ls to replace the original set (a "switch"). LOIs are unavoidable in modern container and product-tanker trade, where cargo consistently arrives at the discharge port before the paperwork. But every LOI transfers commercial risk from the trader to the shipowner, and every IG P&I Club excludes cover for the underlying liability. Master, DPA, and Operations Manager exposure is significant.

Common LOI scenarios

Delivery without B/L. Receiver requests discharge before the original set arrives. Typical in fast-turnaround container trade Asia → US West Coast where transit time is under B/L courier time; and in product-tanker cargo sales chains where the on-sale is agreed after loading.
Delivery to a party other than the named consignee. Receiver has on-sold the cargo mid-voyage and asks for discharge to the sub-buyer.
Delivery at a port other than the B/L discharge port. Charterer or receiver requests a diversion. Requires LOI to the shipowner + the ship's hull & machinery underwriter's consent for deviation cover.
Switch bills. Intermediate seller wants to replace the original B/L set with a fresh set (typically renaming the shipper, changing the port of loading to conceal origin, or changing the cargo description within the limits of what is factually accurate). Delivered against LOI to the carrier + surrender of the original set.
Removal of B/L clausing. Shipper requests the carrier to issue a clean B/L against LOI, notwithstanding observed cargo damage. HIGH RISK — this LOI is typically unenforceable at common law (see below).
Blending, commingling, or off-specification cargo. Shipper requests operational actions beyond the standard scope of the bill (e.g. cargo blending between grades) against LOI.

P&I Club coverage — the key exclusion

The standard rules of every International Group P&I Club EXCLUDE cover for:

Delivery of cargo without production of an original bill of lading.
Delivery to a party other than that entitled under the B/L.
Delivery at a port other than the port stated in the B/L.
Issuance of a clean B/L for cargo received in observed damaged condition.
Ante-dating or post-dating of the B/L.

When the carrier proceeds against the LOI and a subsequent claim arises from a lawful B/L holder (typically a bank funding a letter of credit), the carrier is on their own for the exposure — often the full cargo value. The LOI is therefore the ONLY security the carrier holds, so its enforceability and financial strength are critical.

LOI wording — the IG-recommended standard

International Group P&I Clubs publish approved standard-form LOI wordings on their websites. The current recommended forms (as at 2025) are:

Form A — Delivery without production of B/L (unsecured LOI, backed only by the requester).
Form A + Bank Guarantee — Same as Form A but co-signed by a first-class international bank. This is the market-standard for high-value cargoes.
Form B — Delivery without production AND at a port other than the B/L discharge port.
Form C — Delivery without production AND to a party other than that named as consignee.
Form D — Delivery without production, AT a port other than the B/L discharge port, AND to a party other than that named.

Standard clauses include: unlimited value coverage (or at least 200% of cargo value); a minimum indemnity period of six years (or the applicable time-bar under the governing law); an English-law + English-court jurisdiction clause; a co-signature by a first-class international bank; specific obligation to indemnify legal costs including reasonable attorney's fees; and provision for security in aid of the indemnity.

Counter-security — the key quality check

An LOI is only as good as the counter-signer. Standard requirements:

First-class international bank. A local branch guarantee is not sufficient unless the parent has the required standing. Check the bank's Moody's / S&P rating; A- or above is the industry expectation.
Bank familiar to the P&I Club. Clubs maintain informal "good bank" lists. A Malaysian trading company's LOI counter-signed by a Malaysian regional bank may be viewed differently from the same LOI counter-signed by HSBC London.
Duration. The LOI must run for at least six years (English limitation period for contractual claims) or the applicable governing-law time-bar. Some Clubs require twelve years for high-value cargoes.
Value. 200% of cargo value is the accepted market benchmark. Some Clubs require 300% on high-fraud-risk trades (e.g. certain crude-oil origins).

The LOI to remove clausing — likely unenforceable

A distinct category of LOI is the request to remove clausing from an otherwise validly-claused bill of lading — typically a shipper asking the Master to issue a clean B/L for cargo received with observed damage, in return for an indemnity if the receiver claims. This LOI is problematic on two grounds:

Illegality at common law. Under Brown Jenkinson v Percy Dalton (1957 CA), an LOI given to induce the carrier to issue a fraudulent misdescription of goods is a fraud upon the ultimate holder and is unenforceable at law. The Master who signs a clean B/L against LOI cannot then rely on the LOI to recover from the shipper.
Personal criminal exposure. Knowingly issuing a false document to induce reliance by a third party can constitute fraud under criminal law in many jurisdictions.

Bright-line rule for Masters: NEVER agree to remove clausing under LOI. Refer any such request to owners and P&I. The commercial pressure is real but the exposure is worse.

The Master's procedural checklist

Notify owners and DPA immediately. Do not agree to any LOI request without express written authorisation.
Refer the LOI text to the P&I Club for review. Approved IG-standard forms are the baseline; any deviation needs express Club review.
Verify the counter-signing bank is on the Club's approved list and holds the required rating.
Confirm the value, duration, and jurisdiction terms match the Club's minimum.
Retain a signed original LOI in the Master's file plus a copy to the owner's office. Return of surrendered original B/Ls (in a switch scenario) must also be recorded.
For delivery-without-B/L LOIs, retain evidence of the identity check of the receiving party.