DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY

BANKING AND INSURANCE LAW

FINAL DRAFT ON
DOCTRINE OF INDEMNITY AND SUBROGATION

Submitted to: Submitted by:

Dr. Shashank Shekhar Vijay Singh

Assistant Professor (Law) Roll No.- 170101159
Dr. Ram Manohar Lohiya BA.LLB (Hons.)
National Law University VI Semester
 CONTENT

I. Doctrine of INDEMNITY
 Definition and Nature along with essentials.
 Provisions in U.K.
i. Oriental fire and general insurance co. v Savoy Solvent Oil Extractions
Ltd.
ii. Richardson Re, ex parte The Governors of St. Thomas Hospital.
 Provisions in India.
i. Gajanan Moreshwar v Morehwar Madan
ii. Osman Jamal and Sons Ltd. vs Gopal Purshottam
 Validity of contract of indemnity
 Right of indemnity holder

II. Doctrine of SUBROGATION

 Meaning of Subrogation
 Concept of Subrogation
 Principal of Indemnity
 Categories of Subrogation
 Principals of Subrogation
 Conclusion
 I. DOCTRINE OF INDEMNITY

 Definition and Nature

“Indemnity” is a widespread expression used not only in a contractual context. It can be

defined as “[a] duty to make good any loss, damage or liability incurred by another,” or
alternatively “[t]he right of an injured party to claim reimbursement for its loss, damage or
liability from a person who has such duty.”1
If we see the literal meaning Indemnity means “Security from the loss”. This term was
generally used for insurance contracts. But it may be noted here that Life insurances is not a
contract of indemnity.
Its legal connotation is when one person promises to another to save him from the loss
incurring from his performing any duty.
An agreement of indemnity, as a concept developed under common law, is an agreement
wherein the promisor, promises to save the promisee harmless from loss caused by events or
accidents which do not or may not depend on the conduct of any person or from liability for
something done by the promisee at the request of the promisor.
In common law Indemnity was established in the case of Adamson v Jarvis.
The plaintiff an auctioneer, sold certain cattle on the instruction of the defendant. It
subsequently turned out that the livestock didn’t belong to the defendant, but to another
person, who made the auctioneer liable and the auctioneer in turn sued the defendant for the
loss he had thus suffered by acting on the defendant’s direction. The court laid down that the
plaintiff having acted on the request of the defendant was entitled to assume that, if, what he
did turned out to be wrongful, he would be indemnified by the defendant.
Thus Indemnity in English Law means a promise to save a person harmless from the
consequences of an act. The promise may be express or it may be implied from the
circumstances of the case.2
Whereas Section 124 of the Contract Act, 1872 defines a contract of Indemnity as "a
contract by which one party promises to save the other from loss caused to him by the
contract of the promisor himself, or by the conduct of any other person." In simple words, an
indemnity is a promise to compensate for another's loss.
 Provisions in U.K.
1
Black’s Law Dictionary
2
Avtar singh pg 571
Provisions of the common law on the contract of indemnity are different as to the provisions
in the Indian law. Earlier there was a maxim used in English law for the contract of
indemnity i.e. “YOU MUST BE DAMNIFIED BEFORE YOU CAN CLAIM TO BE
INDEMNIFIED”.
The original English rule was that indemnity was payable only after the indemnity-holder has
suffered actual loss by paying off the claims. I.e. no action could be brought against the
indemnifier until the indemnity-holder had suffered actual loss. Only after a loss has been
suffered by the indemnity holder by acting on the instructions of the promisor or indemnifier
and all damages beard by him in defending the suit or to prevent it or while compromising on
it are paid, then only afterward he can sue the indemnifier for the payments of all the costs
beard by him. These were the earlier provisions. This situation created a great hardship in
those cases where the indemnity-holder was not in a position to meet the claim out of his
pocket. Relief was provided to indemnity-holder in such cases by the Court of Equity.
According to the rules evolved by the Court of Equity, it was no more necessary for the
indemnity-holder to be damnified before he could be indemnified. In other words, the
indemnity-holder can now compel the indemnifier to save him from the loss in respect of
liability against which indemnity has been promised, in the case of:
Richardson Re, ex parte The Governors of St. Thomas Hospital.3
Where Buckley LJ observed: “Indemnity is not necessarily given by repayment after
payment. Indemnity requires that the party to be indemnify in the first instanced shall never
be call upon to pay”4
In Liverpool Mortgage Insurance Co.’s Re,5 Kennedy LJ observed “that indemnity does not
merely mean to reimburse in respect of the moneys paid, but to save from the loss in respect
of the liability against which the indemnity has been given because otherwise indemnity may
be worth very little if the indemnity-holder is not able to pay in the first instance”
Under English law, the word ‘indemnity’ carries a much wider connotation than given to it
under the Indian Contract Act. It includes a contract to save the promisee from a loss,
whether it be caused by human agency or any other event like an accident and fire. Under
English law, a contract of insurance (other than life insurance) is a contract of indemnity.
Oriental fire and general insurance co. v Savoy Solvent Oil Extractions Ltd

3
(1911)2KB 705, 715 (CA)
4
Supra at p.715
5
(1914) 2 Ch 617, 638: (1914-1915) All ER Rep 1158 (CA)
Life insurance contract is, however not a contract of indemnity because in such a contract
different considerations apply. A contract of life insurance, for instance, may provide the
payment of a certain sum of money either on the death of a person, or on the expiry of a
stipulated period of time (even if the assured is still alive). In such a case, the question of
amount of loss suffered by the assured, or indemnity for the same does not arise. Moreover,
even if a certain sum is payable in the event of death, since, unlike property, the life of a
person cannot be valued, the whole of the amount assured becomes payable. For that reason
also, it is not a contract of indemnity.

 Provision in INDIA
As such the scope of “Indemnity”, as a concept developed under the common law, is much
wider in its scope and application than the scope of “Indemnity” as defined under Section
124 of the Indian Contract Act 1872 (“Act”). “Indemnity”, as developed in common law,
includes losses caused by events or accidents which may not depend on the conduct of any
person and therefore includes losses due to accident or events which have not been caused by
the indemnifier or any other person. Section 124 of the Act, in contrast, limits itself to losses
caused by the indemnifier or any other person. It does not, within its scope, include
indemnity to losses arising out of any natural event or any accident not caused by any person.
Thus the very process of definition is restricted to cases where there is a promise to
indemnify against loss caused by (i) by the promiser himself, or (ii) by any other person, so
the definition excludes from its purview cases of loss arising from acidents like fire or perils
of the sea. i.e. the loss must be covered by some Human Agency.
In the case of Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri:6
Section 124 of the Act, deals only with one particular kind of indemnity which arises from a
promise made by the indemnifier to save the indemnified from the loss caused to him by the
conduct of the indemnifier himself or by the conduct of any other person, but does not deal
with those classes of cases where the indemnity arises from loss caused by events or
accidents which do not or may not depend upon the conduct of the indemnifier or any other
person, or by reason of liability incurred by something done by the indemnified at the request
of the indemnifier. Section 125 of the Act, deals only with the rights of the indemnity-holder
in the event of his being sued. It is by no means exhaustive of the rights of the indemnity-
holder, who has other rights besides those mentioned in the section. It was further discussed
that an indemnity might be worth very little indeed if the indemnified could not enforce his
indemnity till he had actually paid the loss. If a suit was filed against him, he had actually to
wait till a judgment was pronounced, and it was only after he had satisfied the judgment that
he could sue on his indemnity. It is clear that this might under certain circumstances throw an
intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the
judgment and yet he could not avail himself of his indemnity till he had done so. Therefore
the Court of equity stepped in and mitigated the rigor of the common law and held that where
the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon
the indemnifier to save him from that liability and to pay it off.
In the case of The New India Assurance Company Ltd. vs. The State Trading Corporation
of India Ltd. and Anr.
6
The Gujarat High Court relied upon the view taken in Gajanan Moreshwar Parelkar vs.
Moreshwar Madan Mantri and held that in view of Section 124 of the Contract Act, where
the defendants promise to indemnify is an absolute one; a suit can be filed immediately upon
failure of performance, irrespective of actual loss. In this judgment the Law Commission of
India accepted the view that, to indemnify does not mean to reimburse in respect of the
money paid, but, in accordance with its derivation, to save from loss in respect of the liability
against which the indemnity has been given.
The Law Commission of India in its 13th Report, 1958, has expressed the opinion that “the
view expressed by Chagla J., is correct and should be adopted by the legislature.” The Law
Commission recommended that as in English Law, “the right of the indemnity-holder should
be more fully defined and the remedies of an indemnity-holder should be indicated even in
cases where he has not been sued.”
Indian Contract Act does not specifically provide that there can be an implied contract of
indemnity. The Privy Council has, however, recognized an implied contract of indemnity
also.7 The Law Commission of India in its 13th Report, 1958 on the Indian Contract Act,
1872, has recommended the amendment of Section 124. According to its recommendation,
“The definition of the ‘Contract of Indemnity’ in Section 124 he expanded to include cases of
loss caused by events which may or may not depend upon the conduct of any person. It
should also provide clearly that the promise may also be implied.”
Osman Jamal And Sons Ltd. vs Gopal Purshottam

Plaintiff Company agreed to act as commission agent for the defendant firm for purchase and
sale of “Hessian” and “Gunnies” and charge commission on all such purchases and the
defendant firm agreed to indemnify the plaintiff against all losses in respect of such
transactions. The plaintiff company purchased certain Hessian from one Maliram Ramjidas.
The defendant firm failed to pay for or take delivery of the Hessian. Then Maliram Ramjidas
resoled it at lesser price and claimed the difference as damages from the plaintiff company.
The plaintiff company went into liquidation and the liquidator filed a suit to recover the
amount claimed by Maliram from the defendant firm under the indemnity. The defendant
argued that in as much as the plaintiff had not yet paid any amount to Maliram in respect of
their liability they were not entitled to maintain the suit under indemnity. It was held negative
and decided in plaintiff’s favour with a direction that the amount when recovered from the
defendant firm should be paid to Maliram Ramjidas.
Thus we find out that the basic difference between the indemnity in English law and Indian
law is that, the English law is wide enough to cover the losses by fire and sea peril whereas
7
Secretary of State v. The Bank of India Ltd. AIR 1938 P.C 191
the Indian law doesn’t approve this. Moreover, in the Indian law the loss should be caused by
some human agency i.e. the promisor himself or by the conduct of any other person. Whereas
in English law loss caused by a natural calamity and the promisor are considered but not by
any third party.

 VALIDITY OF INDEMNITY AGREEMENT

A contract of indemnity is one of the species of contracts. The principles applicable to
contracts in general are also applicable to such contracts so much so that the rules such as
free consent, legality of object, etc., are equally applicable. Where the consent to an
agreement is caused by coercion, fraud, misrepresentation, the agreement is voidable at the
option of the party whose consent was so caused. As per the requirement of the Contract Act,
the object of the agreement must be lawful. An agreement, the object of which is opposed to
the law or against the public policy, is either unlawful or void depending upon the provision
of the law to which it is subject.
 RIGHT OF THE INDEMNITY HOLDER – (SECTION 125)

An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to
the following rights –
1. Right to recover damages – he is entitled to recover all damages which he might have been
compelled to pay in any suit in respect of any matter covered by the contract.
2. Right to recover costs – He is entitled to recover all costs incidental to the institution and
defending of the suit.
3. Right to recover sums paid under compromise – he is entitled to recover all amounts which
he had paid under the terms of the compromise of such suit. However, the compensation
must not be against the directions of the indemnifier. It must be prudent and authorized by
the indemnifier.
4. Right to sue for specific performance – he is entitled to sue for specific performance if he
has incurred absolute liability and the contract covers such liability. The promisee in a
contract of indemnity, acting within the scope of his authority, is entitled to recover from the
promisor-
(1) All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies
(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it,
he did not contravene the orders of the promisor, and acted as it would have been prudent for
him to act in the absence of any contract of indemnity, or if the promisor authorized him to
bring or defend the suit;
(3) All sums which he may have paid under the terms of any compromise of any such suit, if
the compromise was not.

I. DOCTRINE OF SUBROGATION
Meaning of Subrogation

“SUBROGATION” means substitution of a person or group by another in respect of a debt

in insurance claim, accompanies by the transfer of any associated rights and duties.
Investopedia: “Subrogation is a term describing a legal right held by most insurance
carriers to legally pursue a third party that caused an insurance loss to the insured. This is
done in order to recover the amount of the claim paid by the insurance carrier to the insured
for the loss.”
The term ‘Subrogation’ in the context of Insurance, has been defined in Black’s Law
Dictionary as:
“The Principal under which an insurer that has paid a loss under an insurance policy is
entitled to all the rights and remedies belonging to the insured against a third party with
respect to any loss covered by the policy”.
“Subrogation” also defined in Dan B. Dobb’s Law of Contract, which reads as follows;
“Subrogation simply means substitution of one person for another; that is, one person is
allowed to stand in the shoes of another and assert that person’s rights against the defendant.
Factually, the case arises because for some justifiable reason, the subrogation plaintiff has
paid a debt owned by the defendant.”
“Subrogation” also defined in Laurence P. Simpson’s Handbook of Law of Suretyship,
which reads as follows;
“Subrogation is equitable to assignment. The right comes into existence when surety
becomes obligated, and this is important as affecting priorities, but such right of subrogation
dose not become a cause of action until debt is duly paid. Subrogation entitles the surety to
use any remedy against the principal which the creditor could have used, and in general to
enjoy the benefit of any advantage that the creditor had, such as a mortgage, lien, power to
confess judgement, to follow trust funds, to proceed against third person, who has promised
either the principal or the creditor to pay the debts.”

Concept of Subrogation

it was explained by Chancellor Boyd in National Fire Insurance Co. Vs. McLaren;
“The doctrine of subrogation is a creature of equity not founded on contract, but arising out
of relations of the parties. In cases of insurance, where third party is liable to make good the
loss, the right of subrogation depends upon and is regulated by the broad underlying principal
of securing full indemnity to the insured, on the one hand, and on the other of holding him
accountable as trustees for any advantage he may obtain over and above compensation for his
loss. Being equitable rights, it partakes of all the ordinary incidents of such rights, one of
which is that in administering relief the Court will regard not so much the form as the
substance of transaction. The primary consideration is to see that the insured gets full
compensation for the property destroyed and the expenses incurred in making good his loss.
The next thing is to see that he holds any surplus for the benefit of the insurance company.”
Principal of Indemnity

As we know that the Contract of Fire Insurance is like a Contract of Indemnity. It means that
the insured, in case of loss covered by the Insurance Policy, shall be fully indemnified but
shall never be more than fully indemnified. The insured shall never be more than fully
indemnified, that gives rise to “Doctrine of Subrogation”. The right of subrogation is a
necessary corollary of the Principal of Indemnity and it is necessary for its preservation. 
Thus, the insurer is, therefore, entitled to exercise whatever rights the assured possesses to
recover to that extent compensation for the loss, but it must do, so in the name of assured.

Categories of Subrogation

i) Subrogation by Equitable Assignment;

This type of subrogation is not evidence by document, but is based on insurer policy and
receipt issued by the assured acknowledging full settlement of claim relating to loss. Where
the insurer has paid full loss incurred by the assured, it can sue in the name of the assured for
the amount paid to the assured. 
Let’s consider an example, Mr. A has lodged a claim on insurance company X Ltd, against
his fire insurance policy of Rs. 10.00 Lakhs. In real case the fire broke due to mistake or
negligence of Mr. B, neighbour of Mr. A. The insurance company X Ltd., has paid Rs. 10.00
Lakhs to Mr. A and acquired right to sue Mr. B on behalf of Mr. A for his negligence. If any
amount received from Mr. B to Mr. A, Mr. A should return it to the X Ltd.
In another case if X Ltd, has paid only Rs. 5.00 Lakhs and Mr. A received from Mr. B
Rs.6.00 Lakhs then he has to return X Ltd., Rs. 1.00 Lakh. 

ii) Subrogation by Contract;

In this category, Subrogation is evidenced by an Instrument. To avoid any dispute about right
to claim reimbursement, or to settle the priority of inter-se claims or confirm the quantum of
reimbursement in pursuant of subrogation , and to ensure cooperation of assured in suing the
wrongdoer , the insurer usually obtains a Letter of Subrogation in writing , specifying its
rights vis-vis the assured. Letter of Subrogation is a contractual arrangement, which specifies
the rights of insurer and the assured. Through this insurer get the rights to sue the wrongdoers
on behalf of assured and recovered the amount paid by it the assured under insurance policy
to the extent excess of the loss incurred by the assured.

iii) Subrogation -cum-assignment;

In this case assured executes a Letter of Subrogation-cum-assignment enabling the insurer
retain entire amount recovered (even if it is more than, what was paid by insurer to the
assured) and giving an option to sue in the name of assured or to sue on its own name. 
In all above three cases an insurer asks assured to sue the third party(wrongdoer) and can join
as co-plaintiff or an insurer may obtain a Special Power of Attorney from the assured and sue
the wrongdoer as attorney of the assured.
Principals of Subrogation

1. Equitable right of subrogation arises when insurer settles the claim of the assured, for the
entire loss. When there is equitable subrogation in favour of the insurer, then the insurer
entitles to stand in shoes of the assured and sue the wrongdoer;
2. Subrogation not terminate the rights of assured to sue the wrongdoer and recover loss. The
Subrogation only gives rights to the insurer to sue the wrongdoer on behalf of assured;
3. Where assured has issued a Letter of Subrogation, reducing the terms of subrogation, the
rights of insurer vis-vis the assured will be governed by the terms of Letter of Subrogation;
4. Any plaint, complaint, or petition for recovery of compensation can be filed in the name of
the assured, or by the assured represented by the insurer as Subrogee-cum-attorney, or by the
assured and insurer as co-plaintiff or co-complainants.
5. Where assured has issued a Letter of Subrogation-cum-assignment in favour of insurer, the
assured has left no right or interest. The assured in this case no longer entitle to sue
wrongdoer, on its own account and for its own benefit. In this case the insure become entitle
to the whole amount recovered from the third party or wrongdoer, even though it has paid
less amount than the amount recovered to the assured to settle the claim.

Conclusion

The rights of subrogation only arise when the policy is a valid contract of insurance. In order
to bring into existence, the insurer’s rights of subrogation, it is necessary that the claim of the
insured under the policy actually to him, and it arises upon payment of partial as well as full
claim of loss. The rights of insurer to subrogation must be understood with this limitation,
which is the right must be incidental or attached to the ownership of the thing, insured. The
insurer is entitled to every benefit to which the assured is entitled in respect of the thing to
which the contract of insurance relates, but to nothing more.