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How To Write A Letter of Indemnity
A letter of indemnity is a legal document where one or both contracting parties guarantee to indemnify the other party or a third party in certain events.
To indemnify someone means that you will ensure that that person is not held liable for something or is financially protected against certain losses.
For example, a bank may provide a letter of indemnity where it will agree to pay a contracting party or a third party should there be a contractual default.
Now that we have that out of the way, you are looking to draft your own letter of indemnity as you are getting into a commercial transaction or you’re looking to complete a business transaction of some kind.
How do you write a letter of indemnity?
What do you include in it?
Well, keep reading as I will tell you exactly how you should write your letter of indemnity and what goes in a typical letter.
The first element of a letter of indemnity is the date on which the letter is being issued.
The letter of indemnity can follow a business letter format or a contract format.
Generally, if the letter of indemnity is given by one party for the benefit of another party, it will follow a letter format.
If the letter of indemnity contains mutual indemnification language, then it will follow a contract format.
This Letter of Indemnity Is Dated June 15, 20XX
It’s important that you clearly present the parties to the letter of indemnity.
The contracting parties are typically the indemnifying party along with the indemnified party.
It’s possible that a party agrees to indemnify a third party who is not party to the agreement as well.
Company ABC, Inc. (“Indemnifying Party”)
Company XYZ, Inc. (“Indemnified Party”)
The indemnification language is one of the most important parts of the letter of indemnity.
The indemnification wording will provide for the nature and scope of the indemnification.
Here are a few examples:
Company ABC, Inc. shall indemnify and hold Company XYZ, Inc. harmless from any and all liabilities, damages, penalties, claims, demands, actions, suits, judgments and any and all costs, expenses or disbursements (including reasonable attorneys’ fees and expenses)
In this example, the indemnification covers any and all liabilities, damages, penalties, claims, demands, actions, suits, judgments and any and all costs, expenses or disbursements, and reasonable attorneys’ fees.
Company ABC, Inc. shall indemnify Company XYZ, Inc. against all legal expenses, losses, liabilities, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges in connection therewith) (collectively, the “Indemnified Liabilities”)
In this example, the indemnification covers all legal expenses, losses, liabilities, judgments, fines, penalties and amounts paid in the settlement of a lawsuit.
Events Triggering Indemnity
Another element that is important relating to the indemnification is a clear reference to the events triggering the indemnification.
Here are a few examples:
Resulting from a third-party claim filed against Company XYZ, Inc. for Company ABC Inc.’s acts of willful misconduct in any way relating to or arising out of this Agreement
In the first example, the triggering event is “third party claims” filed in connection with Company ABC’s acts of “willful misconduct”.
Any other acts (like acts of simple negligence or gross negligence) will not meet the trigger for this indemnification.
This is a narrow indemnification obligation as it only covers “third party claims” filed when there were acts of “willful negligence” which is a high threshold to achieve.
Resulting from any claim filed against Company XYZ, Inc. for any and all acts committed by, or on behalf of, Company ABC, Inc. in performing its obligations hereunder.
In this example, the triggering event is “any claims” filed against Company XYZ in connection with “any acts” committed by Company ABC.
This is a much broader type of indemnification obligation.
You should also consider how much is the total value that you will agree to indemnify another party or expect to be indemnified.
Typically, beneficiaries of the indemnification will want the other party to accept to indemnify in an unlimited fashion.
In other words, an unlimited liability threshold.
However, the indemnifying party may have an interest in reducing the total value of the indemnification by putting a cap on the total value.
For example, the indemnifying party may say that the total cap will not exceed $50,000 or will not exceed the amount the client has paid under the contract.
Governing Law And Venue
The indemnification letter should clearly define the governing law and venue.
In other words, the parties should define what law will apply to the indemnification letter in case of a dispute and before which court will they litigate the matter.
The matter could be litigated before the courts or the parties could opt for an arbitration clause.
The last step is to include a signature block for all the signing parties.
If a party is signing as an individual, then the person will print his or her full name and sign on a signature line above it.
If a party is signing on behalf of a legal entity, the legal entity’s full name should be stated along with the name and title of the authorized signatory.
How Does The Letter of Indemnity Work
A letter of indemnity refers to a party’s legal commitment to protect another party from liability in certain events.
In business, contracting parties will typically include indemnification clauses in their contracts where one party will seek indemnification in the event of another party’s breach of contract.
To indemnify someone means to “hold someone harmless”.
In other words, when you indemnify someone, you are taking on the legal obligation to ensure that another party does not suffer a loss.
The fundamental idea behind a letter of indemnity is for a party to compensate another party for losses resulting from specific incidents.
When Will You Need A Letter of Indemnity
You may need a letter of indemnity whenever you are doing a business transaction where you are taking a certain level of risk.
For example, a client will ask a service provider for an indemnification letter in case the service provider’s services cause the client damages.
A retailer may ask for a letter of indemnity from a manufacturer in case it is sued by end customers for the defectiveness of the goods.
In most commercial contracts, the contracting parties will consider indemnification language where one party indemnifies another or where both parties mutually indemnify one another.
So there you have it folks!
How do you write a letter of indemnity?
A letter of indemnity is essentially a legal document where a party agrees to indemnify another party in certain events.
Writing a letter of indemnity requires that you properly understand the concept of indemnity, be clear about the indemnification triggers, and the scope of your indemnification.
If you are not sure, don’t hesitate to consult a qualified contract attorney for advice.
Now that you know how to write an indemnification letter, good luck with your drafting!
I hope you enjoyed this article on How To Write A Letter of Indemnity! Be sure to check out more articles on my blog. Enjoy!
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