One of the most commonly come across legal term in our daily lives is insurance,
be it life insurance, vehicle insurance or any valuable property which one would
like to keep safe or prevent loss in case it gets damaged or destroyed. Thus,
insurance has been incorporated into everyday parlance in terms of a common
social security tool to prevent economic loss to people and keep them away from
a scenario of disadvantage. Usually, in terms of trade, business and commerce in
the modern 21st century contracts, there has been an increasing need and
relevance of contracts of insurance and indemnity due to unpredictable nature of
commercial transactions involving high risks in the markets.
The term and concept of Insurance contracts has arisen out of contract of
Indemnity defined under section 124 of the Indian Contract Act whose verbatim
A contract by which one party promises to save the other from loss
caused to him by the conduct of the promisor himself, or by the conduct of any
other person, is called a contract of indemnity.
The Indian law has given
a narrower scope to the contract of insurance and indemnity as compared to the
British legal system or the legal systems of other nations.
Taking into consideration the interpretation of section 124 of the act, we can
understand and bring it into our cognition that any contract wherein a person
promises to save the other person from the consequences of a proceeding which
may be commenced against him in the future is called a contract of
indemnity. Thus, it makes the interpretation clear that every contract of
insurance is a contract of indemnity but the reversal of this situation may not
The contract of Indemnity and insurance come under the ambit of special types of
contracts which finds its foundation in protecting the other parties against
In a contract of indemnity, there are two players namely:
- The party which is indemnified or holder.
- What is the distinction between damages and indemnity in context of
- What is the principle of subrogation in the special contract of
- What parallel can be drawn between contract of Indemnity and insurance
by the courts in deciding matters relating to security of economic losses?
The contract of Indemnity is a special type of contract wherein one party
promises to save the other from the loss caused to him by the conduct of the
promisor himself, or by the conduct of any other person, is called a contract of
Indemnity. To understand this better, let us take an illustration wherein X
enters into a contract to indemnity Y against the consequences of any proceeding
which A may take against Y in respect of a certain sum of Rs.200/- . The
contract between X and Y is an example of contract of Indemnity.
Indemnity contracts may be classified into two subtypes namely:
- Express indemnity:
When the consent of indemnity is given in writing or
orally, it is an express contract of indemnity.
For eg: A and B enter into a contract where A agrees to reimburse loss caused to
him by a third party. This is called contract of express indemnity.
- Implied indemnity:
When the contract of Indemnity comes into existence
through the Lex Loci or the law of land that is in existence at a particular
point of time, it is called an implied contract of indemnity.
For eg: In an agent - principal relationship, there occurs some loss to one
agent due to some unforeseen circumstances. This would create a scenario of
implied indemnity as the laws regulate the conduct of indemnity between the
agent and principal.
Relation between contract of insurance and contract of indemnity
In the common law context, the contracts of indemnity is usually given a very
narrow interpretation wherein there is kept very low disctinction between
contract of indemnity and insurance. Nearly every insurance except insurance of
life and personal accident insurance come under contract of indemnity.
A suit can be brought upon immediately after failure of performance,
irrespective of any actual loss. It would also be an entitlement of an
indemnity holder to call upon the indemnifier to save himself from the liability
by paying it off too.
Key features of a contract of indemnity are:
- Rights of the parties in the contract
Section 125 of the Indian contract act states the rights available with the
indemnity holder when he acts within his scope of authority to recover from the
promisor the costs laid down under S. 125(1) to S.125(3). These include the
costs in terms of defending the suit, sums paid under compromise, damages paid
- Immunity from losses
The contract of indemnity often leads to protection of losses to the party
holding the indemnity from the losses which may be caused by the conduct of the
party itself or the action of third party.
- Contract must be valid
According to the provisions of the Indian contract act, there are various
essentials that are needed to be followed which are contained in section 1 to
section 75 of the Indian Contract Act. This general law is needed to be
followed in case of making it a valid contract.
The liability of an indemnifier under a contract of indemnity does not start
arising randomly but the act is silent on this issue. Thus, there have been
various judicial interpretations and legislative enactments in order to satisfy
this question by various high courts across the country.
In the leading case of Gajanan Moreshwar Vs. Moreshwar Madan, the defendant
was allowed to erect a building on the land taken on lease from the municipal
department of the city. The defendant came under a debt from the building
material supplier twice and on both occasions, mortgaged a part of his land to a
third party on a consideration that he would be discharged of his liabilities
arisisng out of it. However, he failed to do so and the defendant had to face a
suit for allegedly getting the liabilities discharged and being an indemnifier,
Gajanan had to face a suit.
The courts held in this case that In the leading case of Gajanan Moreshwar vs.
, an observation was made by the judge that:
If the party holding the indemnity has been called for having incurred a
liability which is absolute in nature, he has the entitlement to call upon the
other party to pay the liability amount.
A special contract called contract of indemnity is one where one party agrees to
save the other party from loss being caused to him by the conduct of the
promisor himself, or through the conduct of any other party. This is what
section 124 and 125 of the act also state.
In another leading case of State Bank of India and another Vs. Mula Sahkari
Sakhar Karkhana Ltd
., it was a commonly held principal that a bank guarantee
is a separate, distinct and independent contract between the bank and defendants
and there is a difference between a contract of guarantee and a contract of
Indemnity wherein when one party agrees to indemnify other with respect to all
the claims, damages, losses, actions and costs arising out of the suit, it is a
contract of indemnity strictly.
In the leading case of Osman Jamal and sons ltd Vs. Gopal Purushottam, it
was pointed out by CJ Kennedy that the authority to hold this view in the court
of Equity to indemnify merely does not only mean to reimburse in respect of the
paid money, but also to save in respect from loss all liability against which
the indemnity stands.
There is a difference between the contract of indemnity and payment of damages.
According to various legislative enactments, first of all, the damages can be
claimed only for the actions of the same party while indemnification can be
called for even actions of a third party or any other cause. Another difference
between both of them is that the claim of damages can only be brought in case of
losses arising out of breach of contract while indemnification can be done
before that too. The essential feature of indemnification is that the parties
need to be damnified before being indemnified.
Contract of Insurance
When two parties enter into a contract wherein one party, in exchange of money
called premiums, agrees to pay the other party a certain lump sum of money on
happening of a certain event which may usually cause loss to the party paying
premium is called a contract of insurance.
The essential elements of a contract of Insurance are as follows:
- There must be insurable interest of a party while insuring a particular
good. This was laid down in the historic case of Suraj Mal Ram Niwas Oil
Mills (Private) Limited v. United India Insurance Company Limited &
- There must be a relationship of ubberima fidae or utmost good faith
between the parties wherein one party should not back out of telling all the
essential elements of the case to the parties.
- The principal of subrogation must be involved which means that in case
the party insured is having a position to recover the loss fully or partly
from another party due who whom the loss may have been incurred, according
to the right of subrogation the insurer can subrogate the settlement of the
claim and the party may exercise the right of subrogation before payment of
the actual incurred amount.
These principles and features explain the vital differences between the contract
of indemnity and insurance and through them one can understand that every
contract of insurance is a contract of indemnity while every contract of
Indemnity is not a contract of insurance.
Doctrine of subrogation
The doctrine of subrogation means that the ensurer possesses rights to stand in
place of the insured after the claims have been settle in case there is a
substitute source involved.
This principle is a supplementary principle to the contract of Indemnity wherein
one party becomes entitled to all rights of insured subject matter.
The right of subrogation is an equitable right and is guaranteed under the
rights of equity, justice and good conscience.
In accordance with the Indian Contract Act and the judgment of Secretary of
state VS. The bank of India Ltd, there has been a due consideration given to
the contract of Indemnity and its sub types.
Also, according to various reports of law commission of India, there have been
suggestions of additions of various additional clauses into the contract of
indemnity under section 124 and 125 of the Indian contract act to expand the
horizon of the act and make it more inclusive and dominant.
Moreover, through the above judicial enactments, case laws, legislative
procedures and provisions of different sections, we can understand that there is
a difference between contract of insurance and indemnity along with their
essentials and provisions where contract of indemnity is a superset of contract
of insurance. Also, the principle and doctrine of subrogation has been added
into the context to make it better and more clear in order to understand it
When we look into the context of common law judicial system, we can also
understand that the courts usually have to place their judgment on the golden
trio of equity, justice and good conscience wherein the Indian law lays silent
on various provisions. Thus it becomes the need of the hour to expand and
broaden the scope of this type of special contracts by taking influence from
British common law legal system.
- Avtar Singh – Law Of Contracts And Speicific Relief Act
- Essentials or features of a contract of indemnity available at http://bmc-notes.blogspot.com/2009/05/essentials-or-features-of-contract-of.html
- Anson’s Law Of Contracts
- Pollock And Mulla Law Of Contracts
- Mangladha Ram v Ganda Mai, AIR 1929 Lab 388
- Avtar Singh Law of Contracts and Specific relief act (Pg. 594 - 595)
- New India Assurance Co Ltd v State Trading Corpn of India, AIR 2007 NOC
- ILR (1929) 56 Cal 262
- Myneni S.R, Law Of Insurance, Edition-2010 Asia Law House
Award Winning Article Is Written By: Mr.Akash Sharma
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