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 part y to save him from loss caused to him by the promisor himself, or
by the conduct of any other person.”' 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 part y 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.
- Indian Contract Act 1 872
- 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?
- 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:
- There must be two parties to a contract of indemnity i.e., a promisor and
- The promisor or indemnifier: the one who promises to cover
damages instead of the other party.
- The promisee or indemnity holder or indemnified: the person whose
damage is paid or who is covered.
- This contract is entered into to protect one party from the loss by the
help of another party who bears the damages.
- 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 1 25 of ICA,
- Right to recover damages paid in a suit I Section 125(1â - 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.
- 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 all
owed him to bring or fight the suit.
- Right to recover sums paid under compromise [Section 125(34 j- 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
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:
- Essentials of a general contract:
- Offer and acceptance
- Legal capacity
- Legal purpose
- Free consent
- Essentials of special contract of insurance:
- Incurable interest
- Utmost good faith
- Assignments and nomination
- 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
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 realizing more than the
total liability, which would be contras y 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
- One of the main differences between a contract of indemnity and a
contract of insurance is that in the indemnity clause given in section 1 24
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 part y, instead it is an
- 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
There are many cases which emphasis on different rules of the contract of
Some of them are:
- Dugdale v. Lovering 2:
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.
- Gajanan Moreshwar vs. Moreshwar Madan 3:
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.
- United India Insurance Co. vs. Ms. Annan Singh Munshilal 4:
consigned 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 indemnity.
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:
- 2 1 875 j LR 10 CP 196
- 3 ' 1942) 44 BOMLR 703
- AIR 1994 P H 206
- Section 124 and 125 of Indian Contract Act 1872- These sections define
the contract of indemnity and its principles.
- Section 9 of ICA 1872- lt talks about the implied promises in
- Section 69 of ICA 1872- lt specifies the indemnifier's refund of the
money accrued to the indemnity holder.
- 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.
The bond of indemnity covers a wide range of topics in everyday life. lt 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 truth 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.
- Contract of Indemnity vis -a -vis Insurance
- Contract and Specific Relief- Avtar Singh- EBC
- Modern law and Insurance in India- LexisNexis