Letter of indemnity in shipping: when it is used, the risks

A letter of indemnity (LOI) is a written promise to compensate the shipowner for the consequences of an act that the contract of carriage does not allow, made at the requester's request. In practice that means delivering cargo without the original bill of lading, delivering at a port other than the one named on it, or issuing a clean bill where remarks would be correct. An LOI moves the risk to the signatory, but it does not remove the risk.

When an LOI is asked for

Delivery without the original bill. The UK P&I Club names the common scenario: the cargo arrives before the paperwork, because the voyage is short or the goods were sold several times while afloat. The receiver asks the master to release the cargo against an LOI, with the originals to follow. See bill of lading types for why the original matters.

Change of destination. The buyer wants the cargo delivered at another port than the one on the bill. This is one of the three situations covered by the International Group (IG) wordings and is usually also a reason for a switch bill.

A clean bill against a claused mate's receipt. The shipper asks for a clean bill although the mate's receipt carries remarks. The Swedish Club notes why: a letter of credit may require a clean bill, and a claused bill may mean the seller is not paid. See mate's receipt versus bill of lading.

What an LOI does and does not do

An LOI is a contract between the requester and the shipowner. It gives the shipowner a claim against the signatory if the owner is sued by the true holder of the bill. It does not bind the holder of the bill, it does not change what the carrier owes under the Hague-Visby Rules, and it is worth exactly the creditworthiness of the party that signed.

• Duration. UK P&I stresses that claims can appear years later, so the validity period and the scope matter more than the headline promise.
• Chains of sales. One LOI in a chain of trades effectively stands behind every later sale until the original bills arrive, as UK P&I observes.
• Financial standing. The IG's 2023 circular, as published by UK P&I, strongly advises members to be fully satisfied with the financial standing of any counterparty to a letter of indemnity. The bank-backed variants of the IG wordings exist for this reason.

Why P&I cover is typically prejudiced

The point that surprises charterers and traders most is that the shipowner's insurance does not follow the LOI. Skuld's guidance states that there is no cover for liabilities arising out of delivery of cargo without production of the original bill of lading, unless the club's committee decides otherwise. UK P&I says the same under its own rules: liabilities from the misdelivery are not covered by P&I insurance, and help from the club is at the committee's discretion.

The International Group's 2023 wordings carry a prominent warning of exactly that, on an IG-wide basis: accepting an LOI in the relevant circumstances will prejudice a member's P&I cover, and liabilities are covered only if a club's board decides in its discretion that it is appropriate (IG circular, 12 September 2023, as published by UK P&I). The Swedish Club draws the parallel for clean bills: issuing a clean bill against an LOI where the cargo is damaged does not reinstate P&I cover, because the LOI replaces the cover.

A clean bill of lading and a known defect

The law draws a line that a surveyor should understand. The Hague-Visby Rules let the carrier record the apparent order and condition of the goods, and the bill is prima facie evidence of receipt as described. UK P&I points to Brown Jenkinson v Percy Dalton: an indemnity given to obtain a clean bill where a defect is known is tied to deliberate misrepresentation and cannot be enforced. The Swedish Club is clear about the practical consequence: the master must insist on clausing where damage or contamination was observed at loading.

The same logic applies to switch bills. Skuld warns against requests that change the port of loading or backdate the bill, which may facilitate fraud or sanctions evasion.

The IG standard wordings

The IG issued standard LOIs in 2010 and, after a review with charterer and owner representatives and with BIMCO's input, updated them on 12 September 2023. There are three wordings:

• A: delivery of cargo without production of the original bill of lading;
• B: delivery at a port other than that named on the bill;
• C: both together.

Each has a parallel version with a bank guarantee (AA, BB, CC). Read the current wordings on the IG and club sites. We summarise; we do not reproduce them.

What the surveyor can do

An LOI is not the surveyor's document, but the surveyor's record is what the parties decide on. A dated, specific description of the condition at loading tells the shipowner whether remarks belong on the bill. It protects the surveyor as well. Where remarks are too long for the bill, the Swedish Club suggests a reference to the survey report with the remarks attached. Keep that in mind when writing the findings and when a letter of protest follows.

Practical rule

If you are asked to sign off a condition report as "clean" while your own notes show a defect, write what you saw and let the parties deal with the consequence. Never word a finding so that it makes a letter of indemnity unnecessary.

From nomination to certificate

An LOI request usually arrives at the moment the paperwork is out of step with the cargo. FOSS (Field Operational Services System) keeps the document flow from nomination to certificate in one place: offline entry on board, document generation, a client portal where the client sees nomination, progress and documents, and an audit log per entered value showing who entered what. See how FOSS supports the flow.