SACE-I

1. “The Indian Contract Act, 1872 under Section 124 provides for indemnity and it gives a
narrower interpretation about the insurance contracts. The indemnity contracts only arise out
of any loss occurring to the indemnified due to any fault either caused by the indemnifier
himself or due to the act of a third party. It does not recognize any other form of loss apart
from the ones caused by human conduct. The Law Commission of India, on the contrary, in
its 13th report on the Indian Contract Act, 1872 recommended that the understanding of
indemnity must be expanded to include within its horizon, insurance contracts too as both the
contracts share the same essence, making good the loss of another. It was recommended to
include those cases also within the hold of indemnity which happened not only due to human
conduct but also other natural causes.” In the light of above statement, discuss as to how the
insurance contracts do not fall under indemnity contracts by advancing your arguments and
referring the various decided cases, illustrations and the provisions of the Indian Contract
Act, 1872.
2. Also discuss about the liability of indemnifier regarding its commencement only when either
the indemnified has actually suffered loss or when there is an apprehension that the
indemnified by all chances is likely to suffer it.

I) INDEMNITY AND INSURANCE LAW

The insurance sector has been growing steadily and is a major source of long term
contractual funds needed for infrastructure development.

In the case of Richard v. Forest Land, Timber and Railways Co. Ltd 1 the court while
recognizing the relation of indemnity with regard to the contract of marine insurance stated
that “…the object both of the legislature and of the courts has been to give effect to the idea
of indemnity, which is the basic principle of insurance, and to apply it to the diverse
complications of fact and law in respect of which it has to operate”.

1
All ER 62 HL
 1.1. Relation Between Indemnity And Insurance

The High Court (J. Chagla) in Gajanan Moreshwar Parelkar vs. Moreshwar Madan
Mantri2 has upheld, “This definition covers indemnity for loss caused by human agency only. It
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.”
The same essence was to be seen in the case of United India Insurance Co. vs. M/s. Aman
Singh Munshilal3. “The cover note stipulated delivery to the consigner. Moreover, on its way to
the destination the goods were to be stored in a godown and thereafter to be carried to the
destination. While the goods were in the godown, the goods were destroyed by fire. It was held
that the goods were destroyed during transit, and the insurer was liable as per the insurance
contract. Going by the above case, the person delivering the goods was not asked to indemnify
the plaintiff for the losses even though the accident occurred during the period of transit. Since,
this act of fire was a natural event and not due to human conduct, remedy was not by way of the
indemnity clause in the Indian Contract Act, 1872, rather it was in accordance with the
insurance contract under which the goods were insured”.

The Law Commission of India, on the contrary, in its 13 th report4 on “the Indian Contract
Act, 1872 advised a recommendation that the understanding of indemnity must be expanded to
include within its horizon, insurance contracts too as both the contracts share the same essence,
making good the loss of another. It was recommended to include those cases also within the hold
of indemnity which happened not only due to human conduct but also other natural cause.
It can rather be contended that the Indian Judiciary has always been wider in interpretation
(especially in matters of fundamental rights) as it has social benefit to be its main agenda. Law in
India has always been upright and balanced. It is not prejudiced to issue a harsher verdict upon

2
A.I.R. 1942 Bom. 302, at p. 303
3
A.I.R. 1994 P. & H. 206
4
Law Commission of India, 13th Report on the Indian Contract Act
the defaulters only to appease the aggrieved. Law shall punish only to the extent of wrong
committed. Indian legislations are primarily social welfare legislations that have come up to
improve the standard of lives of the people of India post the colonial era, to give to its people a
law that has as its aim- benefit of the society, a law that upholds the morals and integrity of the
society”.

1.2. Discussing Section 125(1) of the Indian Contract Act, 1872

“1255. Rights of indemnity-holder when sued.—The promisee in a contract of indemnity, acting
within the scope of his authority, is entitled to recover from the promisor— —The promisee in a
contract of indemnity, acting within the scope of his authority, is entitled to recover from the
promisor—
  all damages which he may be compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies”;

The loss to which the indemnifier has consented to or misfortunes that are emerging out of his
negligence or misconduct or that of an outsiders might be borne by him. There should be a nexus
between the demonstration of the indemnifier or the outsider with that of the loss endured. The
idea of remoteness of damage emerge that for a far off harm that is by no chance associated with
the contract of indemnity, the indemnity holder will not consider the indemnifier responsible.

1.3. Insurer’s Liability :- Not Absolute

However, in cases of insurance, the policy-holder or the insurer is unaware of what possible
damage can occur to his insured property. “There is a wide array of possibilities and the absence
of any well-defined, limited conditions for only which the insuring company should pay. There is
no prior assent to only a few particular kinds of accidents to the insured property for which
liability will be that of the company. Any loss that occurs to the insured property will make the
insurer liable. This condition is also not absolute and before making payment for the losses, the
insuring company carries out a survey as to whether the accident has been caused by a genuine
reason or has made crafted only to extort money from the insuring company”. At the point when
the review is discovered palatable, the misfortune must be paid for such a mishap which may
5
The Indian Contract Act, 1872
incorporate human direct, for example, robbery or any normal reason, for example, fire
influencing the safeguarded property. This misfortune might be distantly associated with the case
and there was in no way, shape or form a method of expectation on one or the other piece of the
guaranteeing organization or the approach holder that such an adversity could happen. Indeed,
even without earlier information, for any conceivable harm, the backup plan needs to pay.
“Therefore, insurance is a more secured policy where liability is for a wide range of cause of
actions for an accident. It is more general as compared to indemnity where liability is narrow and
only for a select few, previously agreed cause of actions. Hence, it is best that insurance
contracts are governed by separate legislations as if insurance is included within indemnity.”

1.4. Scope of Liability is narrowed to what is Agreed upon

Then the scope of liability will have to be narrowed down to meet the requirements of the Indian
Contract Act, 1872. If the scope is narrowed and only kept limited to the liabilities that the
insurer company has only agreed to while contract making, then the policy-holder will not have a
safeguard against any freak, remote accident that he suffers but could not anticipate during
entering into the contract. Therefore, considering the nature of Indian laws that speak of welfare,
in order to preserve interests of the public, insurance legislations which are wider in scope should
only govern like contracts.

1.5. Argumenting:- Insurer’s Liability to include loss due to Natural Causes

Instead of narrowing down Insurance contract conditions, the very clause of indemnity is
expanded in order to include the wide range of “accidents including those caused by non-
human conduct such as natural disasters, also if the interpretation also negates section 125(1)
that the extent of liability should not only be limited to previously agreed upon conditions but
must also stretch to any possible form of accident or loss to the promisee, then the position of
the Act shall connote a negative sense. It is a known fact that losses arising out of natural
causes are more severe as compared to acts of human misconduct, the amount of indemnity
shall also increase manifold”d.
By including remote, natural causes of accidents within indemnity will mean that an indemnifier
will have to pay hefty sums to make good a loss that he, prudently could not have foreseen.
Hence, this would amount to unjustness to make a person pay such large sums for remote
accidents. An insuring company on the other hand is such a corporate entity that sees regular
deposition of premiums by its clients has enough wealth to pay large sums of money which an
individual indemnifier will fail to. Therefore, it is only possible for an insuring company to make
good the losses suffered by another of a high magnitude and sum.

Conclusion

“For the above reasons, I am of the opinion that an indemnifier must not be held liable for
accidents arising out of natural causes and for remote acts as well”. He being an individual can
just orchestrate to deal with the risk that he has explicitly or impliedly vowed to or consented to.
On the off chance that adjustments are brought to the repayment provision under the Indian
Contract Act, 1872, at that point the indemnifier will be reserved for unexpected harms will be
uncalled for. This will prompt more noteworthy instances of non-installment by the indemnifiers
and subsequently, expanding number of suits in the court. Subsequently, the oppressed will
confront obstructions in acquiring installment which may cause him further mischief. In any
case, if an insurance agency that is in control of more noteworthy abundance can be made
obligated for the misfortunes of a wide reach, the abused will get cure quicker which is the point
of social government assistance enactments to give viable and fast solution for the bothered.

II) LIABILITY OF INDEMNIFIER (ACTUAL LOSS) AND (APPREHENSION OF LOSS)

The insurance company takes liability only against deposition of premiums by the policy-holder,
hence, their consideration is also well protected here. They are not made to pay for such
damages without any consideration. If an individual pays for such losses that are remote in
nature, it will be like imposing liability unjustly on that person as he will face utter loss.
 On the contrary, an insurance company acts only because it receives equivalent premiums for
the liability it promises to undertake, Therefore, there is no loss to the company as an end result,
as the company too has liability only to the extent of premiums deposited and scheme of
insurance policy undertaken. There is hence, no unjust payment expected from the company that
goes beyond the scope of its liability or consideration provided.

In case of Fireman's Fund Ins. Co. v. Holland Am. Line-Westours, Inc 6 “the court explained
the indemnity under the insurance law. It said that Indemnity principle is a rule of insurance law
which says an insurance policy should not confer a benefit greater in value than the loss suffered
by the insured. It is a basic principle of insurance law, absent bad faith on the part of the insurer;
an insured is entitled to compensation only for losses actually suffered. Under the indemnity
principle of insurance, an insured receives only that amount that will indemnify actual loss, not
an additional windfall above this amount”.

2.1. Position in India

It has been noted above that section-124 recognizes only “such contract as a contract of
indemnity where there is a promise to save another person from loss which may be caused by the
conduct of the promisor himself or by conduct of any other person. It does not cover a promise to
compensate for loss not arising due to human agency. Therefore, a contract of insurance is not
covered by the definition of section-124”. Thus, if under a contract of insurance, an insurer
promises to pay compensation in the event of loss by fire, such a contract does not come within
the purview of section-124.
Such contracts are valid contracts, as being contingent contracts as defined in section 31. In
United India Insurance Co. vs. M/s. Aman Singh Munshilal 7 the “cover note stipulated
delivery to the consigner. Moreover, on its way to the destination the goods were to be stored in
a godown and thereafter to be carried to the destination. While the goods were in the godown,
the goods were destroyed by fire. It was held that the goods were destroyed during transit, and
the insurer was liable as per the insurance contract”.

2.2. Position in England

6
Fed. Appx. 602 (9th Cir. Wash. 2002)
7
AIR 1994 P H 206
Under English law, the word “indemnity” carries a much wider meaning than given to it under
the Indian Contract Act. It includes a contract to save the promise from a loss, whether it is
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. 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

2.3. The Right of Subrogartion and Contribution

“Subrogation is the right or rights of the insurer to assume the rights of the insured legal
rights or to step into the shoes of insured. Rights of subrogation can arise two different ways:
automatically as a matter of law, or by agreement as part of a contract” 8. “Rights of
subrogation can arise two different ways: automatically as a matter of law, or by agreement as
part of a contract”9 Subrogation by contract commonly arises in contracts of insurance.
Subrogation as a matter of law is an equitable doctrine, furthermore, shapes part of a more
extensive group of law known as unfair enhancement. Two regions where subrogation is
important are protection and guarantees. For each situation, the essential reason is that where one
individual (for example normally a safety net provider or an underwriter) makes an installment
on a commitment which is the essential obligation of another gathering, the individual making
the installment is subrogated to the cases of the individual to whom they made the installment as
for any cases or cures which are exercisable against the fundamentally party in question.

“Subrogation is a doctrine founded on the indemnity principle, namely that an insured has a
right to be indemnified against his loss but cannot make a profit from it by getting paid his
insurance money as well as obtaining compensation from a third party”. By way of example

8
What is Subrogation available at thelawdictionary.org/subrogation/
9
legal-dictionary.thefreedictionary.com/subrogation
therefore and as illustrated by one of the leading subrogation cases Castellan v Preston 10, “if an
insured vendor of a property suffers fire damage between exchange and completion and is
indemnified by his insurers, the insured must then account back to insurers when the sale of the
house is completed and he receives the full purchase price to which he was entitled in spite of the
fire”.

Thus as a principle Subrogation emphasizes on the exact loss and not any apprehension or means
by which profit may be earned by parties.

Yorkshire Insurance Co. v. Nisbet Shipping Co 11 “it gives the insurer the right to stand in the
shoes of the insured and avail himself of all the rights and remedies of the insured, whether
already enforced or not. This in essence means that the insured should not gain by indemnifying
his losses from the insurer as well as a wrongdoer. In case of fire insurance as well, the insurer is
subrogated to the rights and remedies the insured has under common law, tort or statute in case
the loss is covered by the policy”.

Secretary of State vs. The Bank of India Ltd12. Brett LJ Observed:-“Every contract of marine
or fire insurance is a contract of indemnity and of indemnity only, the meaning of which is that
the assured in case of a loss is to receive a full indemnity, but is never to receive more. Every
rule of insurance law is adopted in order to carry out this fundamental rule, and if any
proposition is brought forward, the effect of which is opposed to this fundamental rule, it will
found to be wrong”

Contribution

The principle of contribution also flows from the principle of indemnity and is hence, equally
applicable to insurance contracts. “It arises in case of double insurance, that is, when the same
subject matter13” “is insured with more than one insurer by the same insured having the same
interest14” and “against the same peril 15”. In such a situation, “when loss arises, and more than

10
[1883] 11 QBD 380
11
[2009] VSCA 124.
12
[1962] 2 QB 330, 339
13
Insurance: Subrogation: Accident Insurance, 7(2) Michigan Law Review 177, 179 (1908).
14
R. A. S, Insurance: Concept of Indemnity as Limiting Recovery on Fire Insurance Policies, 32(4_
Michigan Law Review 529, 538 (1934).
15
McGee, The Modern Law of Insurance 4 (2006).
one policies are enforceable, the insured may claim from any of the insurers up to the amount of
loss or the assured sum (whichever is less) and the insurer in turn can claim contribution from
the other co-insurers, in proportion to the sums insured by them16” .

In the case of QBE Insurance (Australia) Limited v. Lumley General Insurance Limited 17
“the position as to when and how the right can be exercised differs at common law and under fire
policy condition. Under common law, the position is this that the insured can claim the full
amount of loss from any of insurers of his choice when that insurer will have the trouble of
asking contribution from the other interested insurers But under a policy condition, the insurers
may require the insured to claim proportionately from all the insurers right at the inception rather
than claiming full of the policy subject to this condition. In practice, non-marine policies do
usually contain a condition as such, and it is most unusual to find such a condition in marine
policies”.

CONCLUSION

As it is known and specifically provided, one cannot claim compensation for a breach of contract
when the loss suffered is indirect and/or remote. However, there remains no such exception for a
contract of indemnity. Much is left to the contractual freedom and will of the parties. A typical
indemnity clause thus provides for protection against all kinds of losses, claims and liabilities,
howsoever arising in relation to the specified transaction. Thus, the Indian law position seems to
be no different from the common law one in this regard, though much depends on the nature and
wordings of the contract in question and the Court's inference of the intention of the contracting
parties to include consequential losses. Thus it can be concluded that as a general rule, the law
usually leans unfavorably towards those who try to avoid liability or seek exemption from
liability of their actions, irrespective of where the cause of action arises

16
Avtar Singh, Law of Insurance 8 (3rd ed. 2017).
17
[2011] HCA 31. 6