BusinessDictionary.com defines a letter of indemnity as an official document that insures the property of one party against damage by another. This type of letter is typically written by a bank or insurance company.
Investopedia explains that the main purpose of a letter of indemnity is to assure both parties that financial reparations will be made if part of the contractual obligation is broken. This is generally related to contractual agreements where a valuable item is being transported or taken care of by a second party. According to BusinessDictionary.com, the letter of indemnity assures the party who owns the item that if it is damaged, lost or stolen, the party will be financially compensated.
Investopedia also explains that a letter of indemnity provides peace of mind that no financial losses will occur during the course of the business transaction. In this way, letters of indemnity are similar to insurance policies that replace stolen or damaged property with property or money of equal value. However, unlike insurance policies, letters of indemnity can be agreed upon between individuals and any organization with oversight into the matter. The Law Dictionary notes that a letter of indemnity is often known as an indemnity bond.