Contract of Indemnity and Insurance: Features and Distinctiveness - Legislative

Enactment Judicial Interpretation

Submitted by

Saniya Sharma

Batch 2020-25, DIVISION-E, BA.LL.B. (Group IV),

PRN-20010223130

Symbiosis Law School, NOIDA

Symbiosis International (Deemed University), Pune

In April, 2021

Under the guidance of

Ms. Pallavi Mishra/Dr. Kanan Divetia Assistant Professor

 INDEX

S. No. Content Page No.

1. Introduction 5

2. Research Questions 6

3. Contract of Indemnity and 7

Insurance

4. Judicial Interpretations and 9

legislative enactments

5. Conclusion 11

6. Bibliography 12

7. Turnitin report 13
INTRODUCTION

According to the Indian Contract Act 1872, a contract is nothing but an agreement which is
enforceable by law. There are several types of contracts among which one is contract of
indemnity. A contract of indemnity is a special type of contract. The term ‘indemnity’ means
defense against any damage or a compensation. “A contract of indemnity is one in which one
party promises another party to save him from loss caused to him by the promisor himself, or
by the conduct of any other person.”1 This has been defined under article 124 of the ICA,
1872.

However, in the English law it had a much wider meaning than this. Indemnity in English law
means a promise to protect the other party harmless from the repercussions of an act. Thus,
the English law is wide enough to include any type of actions such as fire or flood, but the
Indian act allows protection against only human made losses.

Another term we come across in our daily lives is ‘insurance’. An insurance is also a contract
in which one party takes a fixed sum of money(premiums) from the other party on a regular
basis, to pay the other party a fixed amount of sum on the happening of a certain event.
Insurance is also a protection against loss. The need for insurance is rising day by day with
the growing uncertainty of events in our daily lives.

Every contract of insurance is a contract of indemnity, except in the case of life and personal
insurance. In fact, law of insurance and law of guarantee are said to be the advanced versions
of law of indemnity.

Contract of indemnity may sound very similar to a contract of insurance to a layman and
therefore allows for anomalies in perception, resulting in confusion, which the study will
attempt to expand on.

1
Indian Contract Act 1872
RESEARCH QUESTIONS

1. What are the features of contract of indemnity and contract of insurance? And how
can a person differentiate between the two keeping in mind the very similar
technicalities?

2. What is the position of contract of indemnity and insurance in India based on the
judicial interpretations and legislative enactments?
CONTRACT OF INDEMNITY AND CONTRACT OF INSURANCE

Features of contract of indemnity

The purpose of entering into an indemnity contract is to protect the promisee against
unplanned damages. The contract of indemnity is held to be valid on the fulfillment of some
essentials which are as follows:

1. There must be two parties to a contract of indemnity i.e., a promisor and a promisee.

i. The promisor or indemnifier: the one who promises to cover damages instead of
the other party.
ii. The promisee or indemnity holder or indemnified: the person whose damage is
paid or who is covered.

2. This contract is entered into to protect one party from the loss by the help of another
party who bears the damages.
3. The contract of indemnity can be in both forms express or implied.

The contract of indemnity should also be a valid contract according to the Indian Contract
Act 1872 and all the sections of ICA are applicable on it.

The promisee or the indemnified holds certain rights against the indemnifier, when he has
acted in the scope of his authority. These rights are defined in section 125 of ICA, which are:

1. Right to recover damages paid in a suit [Section 125(1)]- This grants an indemnity-
holder the right to seek from the indemnifier any damages that he might be obligated
to pay in any proceeding relating to any case to which the indemnity arrangement
relates.

2. Right to recover costs incurred in defending a suit [Section 125(2)] - An indemnity-

holder has the ability to reclaim from the indemnifier any damages that he would be
obligated to incur under any other action if he did not breach the promisor's
instructions and behaved as it would have been fair for him to act in the absence of
any provision of indemnity, or if the promisor allowed him to bring or fight the suit.

3. Right to recover sums paid under compromise [Section 125(3)] - Whether the
agreement was not against the promisor's orders and was one that the promisee might
have made if there had been no contract of indemnity, or whether the promisor
allowed him to compromise the claim, an indemnity-holder has the ability to recover
from the indemnifier any sums charged in the terms in every other arrangement.

The Indian law is silent on when the liability of the indemnifier starts and when he has to pay.
But the high courts of different states have given distinct judgements with regard to the
commencement of liability of the indemnifier.
Features of contract of insurance

If we see the dictionary meaning of the word ‘insurance’, it is defined as an underwriting by a

company, society or a state, to the insured person to provide or safeguard him against the loss
or damage of any kind in return for a regular payment i.e., premiums.
Contract of insurance is based on the principle that whatever has been created will be
destroyed. The uncertainty of events scares the mankind and insurance provides a protection
against the loss which may occur in future. There are many types of insurance of which most
common ones are fire, marine and life insurance. As stated earlier, principle of indemnity is
the guiding principle behind insurance and is applicable in all types of insurance except life,
personal accident and sickness insurances.
The essentials of a contract of insurance are divided into two categories-
1. Essentials of a general contract:
 Offer and acceptance
 Consideration
 Legal capacity
 Legal purpose
 Free consent
2. Essentials of special contract of insurance:
 Indemnity
 Insurable interest
 Utmost good faith
 Subrogation
 Assignments and nomination
 Warranties
 Proximate cause
 Return of premium

Among these essentials, this project is focused on indemnity. This principle ensures that in
the case of loss, the insured party only gets the amount which he has lost and not more than
that. It makes sure that an insurance contract should not become a way of income. The
insured may gain the same financial position which was before he suffered with the damage.

The premiums paid by the insured party acts as a consideration for the contract.
Consideration also comprises of the amount that the insurance company provides when the
insured asks for a claim from the insurer. If the indemnity principle is not applied in a
contract of insurance, the premium rates will grow heavily. Low-cost premiums are ensured
because of indemnity principle as it makes sure that a person does not get more money than
his loss. This comforts the insurer that he may not have to pay more than required and they
will set a low bar for premiums.

Doctrine of Subrogation- If the lost property has any asset left or any right against a third
party, the promisor will subrogate the left property or right of the property so allowing the
insured to hold, it might result in him realising more than the total liability, which would be
contrary to the indemnity principle.

In insurance, indemnity compensates scheme recipients with their real economic damages up
to the insurance policy's limiting rate. Before the insurer will recover, he would be required
to show the sum of the damage generally.
Differences between contract of indemnity and insurance

1. One of the main differences between a contract of indemnity and a contract of

insurance is that in the indemnity clause given in section 124 of ICA protects the
promise only from the loss and damage caused by the actions of indemnifier or a third
party. So, in an insurance contract for life or personal accident, it is covered under
section 31 of ICA which defines contingent contracts.
For example, if a building catches fire, the indemnifier is not responsible to pay for
the loss of the indemnified because the action by which the damage is caused is not
one of the indemnifiers or any third party, instead it is an uncontrollable event.

2. While with an insurance policy, the premium will be paid on a regular basis to protect
against damages, and in an indemnity contract, the affected person will be
compensated after the loss has occurred.

JUDICIAL INTERPRETATIONS AND LEGISLATIVE ENACTMENTS

Judicial Interpretations

There are many cases which emphasis on different rules of the contract of indemnity. Some
of them are:
1. Dugdale v. Lovering2 - The plaintiffs possessed some trucks in their hands that were
alleged by both the defendants and one K.P. Co. The plaintiffs requested an indemnity
bond and the defendants ordered delivery, but got no response. Nonetheless, the
trucks were shipped to the defendants. The defendant was found to be liable to
indemnify the plaintiff because the indemnity bond created an implied promise.

2. Gajanan Moreshwar vs. Moreshwar Madan3 - The plaintiff leased a piece of land
from the Mumbai Municipal Corporation. Plaintiff granted defendant permission to
construct a structure on the property. Defendant incurred a loan of Rs.5ooo from a
construction material supplier twice during this course. Plaintiff mortgaged a portion
of the property to building material supplier on both occasions. Plaintiff, at
defendant's behest, sold the property to defendant in exchange for plaintiff being
relieved of all obligations resulting from the transaction. Defendant didn't follow up
with his promise. Plaintiff sued for his liabilities to be discharged, arguing that the
defendant was his indemnifier. This case held that, the indemnifier is liable to pay as
soon as the loss of the indemnity holder is certain and absolute.

3. United India Insurance Co. vs. M/s. Aman Singh Munshilal 4 - The consigner's
address was stated on the cover note. Furthermore, the goods had to be deposited in a
godown on their way to the destination before being transported there. The products
were lost by fire when they were in the godown. The products were deemed to be lost
in transit, and the insurer was held liable by the terms of the insurance policy. This
case held that in case of fires etc., it is called a contingent contract and not of
2
[1875] LR 10 CP 196
3
(1942) 44 BOMLR 703
4
AIR 1994 P H 206
 indemnity.
Legislative Enactments

The following are the clauses and sections of various acts of the Indian law passed by the
legislature regarding the contract of indemnity and insurance:

1. Section 124 and 125 of Indian Contract Act 1872 - These sections define the
contract of indemnity and its principles.

2. Section 9 of ICA 1872- It talks about the implied promises in a contract.

3. Section 69 of ICA 1872- It specifies the indemnifier's refund of the money accrued to
the indemnity holder.

4. The Insurance Act, 1984- This act lays down the rules and laws for all the insurance
policies in India and ensures that the practices of insurance contracts work fairly.
CONCLUSION

The bond of indemnity covers a wide range of topics in everyday life. It may be found in a
variety of areas, from technical fields, trade operations, and even insurance plans. While
indemnity tends to be limiting, it is not exhaustive, since general rules can be used to define
the indemnity provision. Insurance and indemnification both transfer liability and protect
against financial risks, but they do so in separate ways. In insurance, the liability has a wider
scope than in indemnity.
BIBLIOGRAPHY

Articles

a. Contract of Indemnity vis -a -vis Insurance on legalserviceindia.com

b. Indiankanoon.com

Books

a. Contract and Specific Relief- Avtar Singh- EBC

b. Modern law and Insurance in India- LexisNexis