Well, actually it doesn't. I presume you are speaking of the typical indemnification letter given by one title company to another. The letter simply extends the insurance under a prior owner policy to the new insurer.
For instance, if there is an unsatisfied mortgage on record that everyone believes has been paid in full, the receipt by your title company of an indemnification letter from the prior title company - under an owner policy - allows you to move forward and close. It doesn't satisfy or clear the title cloud. The prior title company still must makes efforts to satisfy the mortgage. They are expected to contact the lender and work to get the satisfaction recorded so the cloud is eventually removed.