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Contract of Indemnity And Insurance

The study of the principle of indemnity in relation to insurance is critical because insurance is a kind of social security, and indemnity in the insurance pays policyholders for their actual economic losses up to the policy's limitation amount. Insurance is designed to safeguard men from unforeseeable events that could otherwise be detrimental to them.

If it is a guarantee that a certain amount of money will be paid to the person insured if a specific catastrophe occurs. With the increasing complexity of life, trade, and commerce, the insurance business and the demand for insurance coverage is growing, and as a result, there is now a dizzying range of insurance coverage. As a result, it is critical to understand the essentials and exceptions to the principle of indemnity and insurance.

Insurance and Guarantee belong to the same genus. The development on the contract of indemnity is indemnity, or in other words, the contract of insurance and the contract of guarantee. In the same way, the doctrine of subrogation was created to carry out the fundamental rule of indemnity. Except for life assurance, every contract of insurance is a contract of indemnity and nothing more.

The term indemnity has a much broader meaning in English law than it does in the Indian Act. A contract of insurance (other than life insurance) is a contract of indemnity under English law. Insurance contract a life insurance contract is not an indemnity contract because different considerations apply in such a contract.

For example, a life insurance contract may provide for the payment of a specific sum of money upon the death of a person or the expiration of a specified period of time (even if the assured is still alive) The Indian Contract Act does not expressly state that an implied contract of indemnity can exist.

Contract of indemnity

Introduction
A contract of indemnity is a specific type of contract defined by Section 124 of the Indian Contract Act, 1872, as [1]:
A contract by which one party promises to save the other from loss caused to him by the promisor's conduct, or by the conduct of any other person.

In the literal sense, the term indemnity means security or protection against a loss or compensation. The main purpose of the contract of indemnity is to safeguard the losses of the other person.

There are two parties to the contract [2]

  1. Promiser:- Who promises to bear the loss.
  2. Promisee:- Whose loss is covered.
A contract of indemnification is entered into to safeguard the promisee from financial damage. The loss might be caused by the promisor's or another person's actions. The indemnification contract might be express or implicit.

Express: [3] i.e., made with words spoken or written,
Implied: i.e. inferred from the conduct of the parties or circumstances of the particular case.

A contract of indemnification is a unique type of agreement. They are subject to the rules of general contract law set forth in Sections 1 to 75 of the Indian Contract Act, 1872. As a result, it must meet all of the requirements for a legal contract.

Rights of indemnity holder [4]

[5]The promisee/ indemnified/ indemnity-holder has the following rights against the promisor/ indemnifier under Section 125 of the Indian Contract Act, 1872, providing he behaved within the limits of his power
  1. Right to Recover Damages Paid in a Lawsuit: [Section 125(1)]

    In any dispute in respect of any matter to which the indemnity contract applies, an indemnity-holder has the right to collect from the indemnifier whatever damages that he may be required to pay.
     
  2. Right to Recover Defendant's Legal Expenses [Section 125(2)]

    If in bringing or defending the suit, he did not contravene the promisor's orders 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, an indemnity-holder has the right to recover from the indemnifier all costs which he may be compelled to pay in any such suit.
     
  3. Right to Recover Compromise Payments [Section 125(3)]

    An indemnity-holder also has the right to recover from the indemnifier all the sums of money paid under the terms of any compromise of any such suit, if the compromise was not against the promisor's orders and was one that the promisee would have made if there had been no contract of indemnity, or if the promisor authorized him to compromise the suit.

Liability of Indemnifier [6]

[7]The Indian Contract Act of 1872 does not specify when the indemnifier's responsibility under the indemnity contract begins. However, many Indian High Courts have held the following rules in this regard:
  • Until the indemnifier has experienced a loss, the indemnifier is not accountable
  • Even though the indemnifier has not discharged his responsibility, the indemnified might compel him to make good on his loss.
  • The court in the landmark case of [8]Gajanan Moreshwar vs. Moreshwar Madan stated: [9]"If the indemnified has acquired a responsibility and the liability is absolute, he is entitled to rely upon the indemnifier to save him from the liability and pay it off."
Thus, a contract of indemnity is a particular arrangement in which one of the contracting parties (the indemnifier) promises to protect the other (the indemnified) against loss caused by the promisor's or any other person's action. These contracts are governed by sections 124 and 125 of the Indian Contract Act, 1872.

[10]Historical development of Principle of Indemnity

Only losses caused by the human agency were covered by the indemnity.
In Gajanan Moreshwar vs. Moreshwar Madan, This definition only covers indemnification for losses caused by human conduct, according to the statement. It excludes those situations in which the indemnity comes from a loss caused by events or incidents that are not or may not be related to the indemnifier's or any other person's actions, or from responsibility incurred as a result of anything done by the indemnified at the indemnifier's request.

The terms and circumstances of indemnification must be stated explicitly in the contract.
It is stated in [11]State Bank of India and others vs. Mula Sahkari Sakhar Karkhana Ltd[12]. that:
A document must be understood on the basis of the terms and conditions contained therein.

It is also common knowledge that while construing a document, the court should not employ any words that the author did not use. The document in question is one that is used in the business world.

It does not appear to be ambiguous on the surface. The paper looks to be a contract of indemnification, according to the High Court. Surrounding circumstances are only significant for document development if there is any ambiguity in it; otherwise, they are irrelevant.

According to the Supreme Court, the abovementioned instrument is a document of indemnification, not a promise, as evidenced by the fact that the appellant was required to indemnify the co-operative society against any losses, claims, damages, actions, and costs that it could incur.

The instrument does not contain the typical terms found in a bank guarantee, such as unequivocal condition, the co-operative society would be able to collect the damages without any delay or demur, or that the guarantee was unconditional and total, as the High Court decided. A bank guarantee must be understood on its own terms, regardless of the objections.

Contract of Insurance

Introduction
Insurance may be described as a contract between two parties in which one party, the insurer, agrees to pay the other party, the insured, a certain amount of money if a specific event occurs in exchange for a predetermined quantity of money called premiums. It entails safeguarding against loss. It is the process of protecting people's interests from loss and uncertainty. It's depending on the agreement. It is a legally binding agreement that has specific terms and conditions.

It may be described as a social technology that reduces or eliminates the danger of death or property damage. With the increasing complexity of life, trade, and commerce, the insurance industry and the demand for insurance coverage is rising, and as a result, there is now a dizzying range of insurance coverage.

However, the most frequent types of insurance are marine, fire, and life. Regardless of the type of insurance or the risk insured against, many insurance law concepts are so fundamental that they apply to all types. Except for life insurance, which is an indemnity contract, every contract of insurance is a contract of absolute good faith that requires some insurable interest to support it, otherwise, it will be a simple gamble.

Certain necessary requisites must be specified in an insurance contract in order for it to be legally binding.

Contracts of indemnity under Indian law: legislative and judicial enactments
In India, a contract of indemnification was begun in the case of [13]Osman Jamal and Sons Ltd vs. Gopal Purshotam[14] where the injured party is a partnership that acts as a commission specialist for the respondent. The litigating firm was in the business of buying and selling Hessian and Gummies, and the offending party firm agreed to reimburse the respondent firm in the event of a catastrophe.

The aggrieved party purchased Hessian from Maliram Ramjets, but the litigating organization is unable to pay for it. As a result, Maliram Ramjets supplied a similar offering at a cheaper price than others. Maliram Ramjets sued the aggrieved party for the misfortune, but the offended party demanded that the plaintiff compensate them since they were now slowing down.

The defendant, on the other hand, refused to pay the damages, stating that he couldn't because of the complaint.

Held: The defendant is obligated to reimburse the plaintiff since he pledged to do so, according to the court.

Indemnity might be declared or assumed in this section. The Privy Council's decision in Secy of [15]State for India in Council v. Bank of India Ltd[16]., in which a counterfeit note endorsement was submitted to a bank and received in good faith and for the value, is an example of implied indemnification. The Public Office afterwards got it for renewal in their name. The compensation was collected from the State by the genuine owner of the note, who was also entitled to claim from the bank on the basis of an implicit guarantee of indemnification.

Gajanan Moreshwar vs. Moreshwar Madan Mantri was one of the case laws and judgments.

In this case, Gajanan Mores had land in Bombay, but it was rented for a long time. Gajanan Moreshwar was relocated to Moreshwar Madan Mantri for a little time. M Madan started working on the plot again and sought some materials from K D Mohandas. When K D Mohandas asked for the material installment, M Madan refused to pay the money and suggested G Moreshwar to set up a house loan deed for K D Mohandas. G Moreshwar imposed a charge on his ownership after deciding on the loan cost. A date was set for the arrival of the primary payment, as specified by the deed. In any instance, M Madan decides to pay the principal amount plus interest to get out of a house loan deed, and sets a specified date for something similar.

The court concluded in this instance that if an indemnity holder has created an absolute duty, the indemnity holder may force the indemnifier to fulfil the responsibility or pay the money. A commitment is not required to compensate for a loss.

In my opinion, the court made the correct conclusion since the indemnifier can compensate the indemnity holder if any responsibility arises, allowing the indemnifier to settle the obligation directly.

And if the indemnity holder creates the responsibility, he must pay the liability since indemnifiers undertake to restore the indemnity holder to his previous state.
In India, all troubles are considered as calamities brought about by the promisor or some other outsider, however in England, all issues are viewed as disasters brought about by any individual, just like an accident.

Conclusion
An indemnification agreement holds one party liable for any injury or loss suffered by the other party as a result of the promisor's or other party's acts. Because the law prohibits persons from transferring their own obligation onto others or seeking to avoid blame, a simple indemnification provision in a contract does not always address liability concerns. A simple indemnification clause can never address a liability concern.

Those who seek to dodge blame or a waiver of responsibility for their actions will find that the law is not on their side. The main reason for this is that a negligent party should not be allowed to totally shift all claims and damages against him to another non-negligent party.

Reference:
  • https://thefactfactor.com/facts/law/civil_law/contract_laws/indian_contract_act/section-125-rights-of-indemnity-holder/11746/
  • http://law.uok.edu.in/Files/5ce6c765-c013-446c-b6ac-b9de496f8751/Custom/Contract%20of%20%20indemnity%20and%20Guarantee%20(2)%20(3%20files%20merged).pdf
  • https://blog.ipleaders.in/laws-indemnity/
  • https://indiankanoon.org/doc/1361099/
  • https://blog.ipleaders.in/contract-indemnity-english-law-indian-law-origin-growth-distinctiveness/
Bibliography: End-Notes:
  1. Section 124 of the Indian Contract Act, 1872
  2. Section 2 in The Indian Contract Act, 1872
  3. Section 9 in The Indian Contract Act, 1872
  4. Right of Indemnity holder are defined under Section 125 in The Indian Contract Act, 1872
  5. Referance https://thefactfactor.com/facts/law/civil_law/contract_laws/indian_contract_act/section-125-rights-of-indemnity-holder/11746/
  6. Referance http://law.uok.edu.in/Files/5ce6c765-c013-446c-b6ac-b9de496f8751/Custom/Contract%20of%20%20indemnity%20and%20Guarantee%20(2)%20(3%20files%20merged).pdf
  7. Referance https://blog.ipleaders.in/laws-indemnity/
  8. Referance https://indiankanoon.org/doc/1361099/
  9. Citation: (1942) 44 BOMLR 703
  10. Referance https://blog.ipleaders.in/contract-indemnity-english-law-indian-law-origin-growth-distinctiveness/
  11. Referance https://indiankanoon.org/doc/1518031/
  12. Citation AIR 2007 SC 2361
  13. Referance Osman Jamal And Sons Ltd. vs Gopal Purshottam on 19 July, 1928 https://indiankanoon.org/doc/1143765/
  14. Citation: AIR 1929 Cal 208, 118 Ind Cas 882
  15. Referance https://indiankanoon.org/doc/1494797/
  16. (1938) 40 BOMLR 868

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