Letter of Indemnity

An indemnity agreement commonly features a "interval of indemnity," which is a designated period when the payment remains effective. Similarly, numerous contracts incorporate a letter of indemnity to ensure both parties adhere to the contract's terms; otherwise, an indemnity payment may be required. Typically, a third party, such as a bank or an insurance company, is responsible for drafting this letter of indemnity.

Example:

A construction company signs a contract to complete a project, and the client requires a letter of indemnity to ensure the company follows all contract terms. The company asks its bank to issue this letter. The letter states that if the construction company fails to meet its obligations, the bank will compensate the client for any losses during the specified “indemnity period.” This gives the client financial protection while the project is underway.