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ALIGARH MUSLIM UNIVERSITY

MURSHIDABAD CENTRE
2012-2013

CONTRACT II

TOPIC:

IDEMNITY AND INSURANCE: FEATURES AND DISTINCTIVENESS

SUBMITTED TO: SUBMITTED BY :


DR. SHAISTA NASRIN VISHAL SISODIYA
(Asst. Prof.) Law 11BALLB-26(III-SEM)
AMU CENTRE GROUP-II
MURSHIDABAD
WEST BENGAL

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ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude to DR. SHAISHTA NASRIM,
who gave me a golden opportunity to do such vital research on Indemnity and Insurance:
features and distinctveness. By encashing this opportunity I consider myself more fortunate,
now I came to know about so many new things, I especially want to thanks to our contract
teacher. By this project, I came across so vital knowledge, and I am sure it will be useful
through out my career. And Secondly I would also like to thank my seniors and friends who
helped me a lot in completing this project within the limited time.

I would like to express my sincere thanks to my course coordinator Dr Mohd junaid, who has
given me valuable suggestions and guidance over the subject.

I am also thankful to the library staff for providing necessary facilities to complete this
project.

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INDEMNITY AND INSURANSE:
FEATURES AND DISTINCTIVENESS

VISHAL SINGH SISODIYA


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BALLB(III-SEM)

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TABLE OF CONTENTS

1.0 Indemnity: features and distinctiveness.............................................................

1.1 Under the contract Act, 1872................

1.2 Implied contract of indemnity.......................................................................

1.3 Indemnity under statutes...............................................................................

1.4 Commencement Of Liability Under Contract Of Indemnity.......................

2.0 Insurance: features and distinctiveness

2.1 Under the contract act, 1872

2.2 Indemnity insurance

2.3 Distinctiveness between indemnity insurance and contingency insurance.

2.4 Contingency insurance

2.5 Characteristics of insurance contract

3.0 Conclusion

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List of Cases :
1. Gajanan Moreshwar Parelkar v. Moreshar Madan Mantri
2. secy of state v. Bank of India Ltd
3. Khetpal Amarnath v. Madhukar Pictures
4. K.M. Rm. Kuppan Chettiar alias Kadiresan Chettiar v. Sp. R.M. Rm. Ramaswamy Chettiar
and another
5. Osman Jamal & Sons Ltd v. Gopal purshotham
6. State of Orissa v. United India Insurance Co

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TOPIC: Indemnity and insurance: features and distinctiveness

1.0 Indemnity: features and distinctiveness

The obligation to indemnify may arise out of contract of Indemnity or from obligation resulting
from relation of parties, or statutes. The term indemnity in law is used in many senses. In the
widest sense, means recompense for any loss or liability which a person has incurred, such as
duty arising from an agreement or otherwise.1

But according to Law Lexicon2 which says to indemnify does not merely means to reimburse
in respect of moneys paid but to save from loss in respect from liability against which
indemnity has been given. Where a person contracts to indemnify another person in respect of
any liability which the latter may have undertaken on his behalf, such other person may compel
the contracting party , before actual damage is done, to place him in a position to meet the
liability that may hereafter may cast upon him.

Indemnity is a special contract under the Indian Contract Act, 1872. All the general principles
which apply to general contracts apply to a contract of indemnity. In order to enforce
a contract of indemnity, all the essentials of a valid contract have to be fulfilled. The indemnity,
to be enforced, must be made for a lawful consideration. A contract of indemnity, where the
object is not lawful cannot be enforced.3 There are two parties in a contract of indemnity:

There are two parties in a contract of indemnity:

1. the indemnifier (the promisor); and

2. the indemnity holder or the indemnified (the promisee).

1
Mulla, Indian Contract and Specific Relief Acts, (12th ed., 2001), p. 1736
2 Aiyar, P. Ramanath,. The law lexicon, Wadhwa and company, 2006, p926
3.K.M. Rm. Kuppan Chettiar alias Kadiresan Chettiar v. Sp. R.M. Rm. Ramaswamy Chettiar and another, AIR
1946 Mad 472.

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Chapter VIII (Section 124 to147) of the Indian Contract Act deals with indemnity and
guarantee. Only two sections- (sections 124 and 125) specifically deal with indemnity. It is a
bipartite contract. The definition of indemnity under the Indian Contract Act (Section 124) is
narrow. According to s.124, A contract by which one party promises to save the other from
loss caused to him by the conduct of the promisor or by the conduct of any other person, is
called a contract of indemnity.4

Contracts of indemnity may also be of various types. In wider sense, as such contracts may
include all contracts of insurance and also of guarantee. In narrow sense, it may be limited to
the contracts to save promise from loss caused by the claims of persons (promisor himself or
the third party) and thus include the contracts of marine insurance and the insurance against
liability to third parties.5 Moreover , the scope of indemnity, is by the process of definition
restricted to the cases where there is a promise to indemnify against loss, caused by the
promisor himself or by any other person. The definition excludes from its purview cases of
loss arising from accidents like fire or perils of the sea. Loss must be caused by some human
agency.6 The definition of indemnity given in s.124 of the Indian contract Act is a narrow one
since it is a promise to save the indemnified from loss caused only by the conduct of the
promisor or any third person, but does not cover loss caused by accidents or events which do
not contain the element of the conduct of the promisor or a third person.7

In an indemnity the possibility of risk of any loss happening is only contingent as against the
indemnifier. It is a matter of construction whether the obligation in the contract is an absolute
obligation, or one of indemnity. Where the promisor incurs an obligation, he can sue for its
enforecement, without the occurrence of actual loss.8

The Law Commission of India, in its Thirteenth Report published in the year 1958 had
recommended that the definition of indemnity under Section 124 of the Indian Contract Act
be amended as follows: A contract by which one party promises, expressly or impliedly, to
save the other from loss caused to him by the conduct of the promisor himself, or by the

4
The Indian contract Act, 1872
5
Mulla, Indian Contract and Specific Relief Acts, (12th ed., 2001), p. 1736
6
Avatar Singh, law of contract, p 584
7
Gajanan Moreshwar v. Moreshwar Madan, AIR 1942 Bom 302
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mulla

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conduct of any other person or by an event not depending on such conduct. But this
recommendation has not been implemented so far by the Indian Parliament.9

1.1 Contract of indemnity under the Act, 1872

s 124 of the act defined the indemnity whereas s125 describe the rights of indemnity holder
in the act. s 124 & 125 do not embody the whole law on the subject of the contracts of
indemnity. These ss only deals with one kind of indemnity which arises from a promise made
by the indemnifier to save the indemnified from the loss caused to him by conduct of any
other person, not with those caused by accident or events.10 It has been held in Gajanan
Moreshwar Parelkar v. Moreshar Madan Mantri11 that the provisions of the Indian Contract
Act dealing with indemnity are not exhaustive on the law of indemnity and hence the courts
here would apply the same equitable principles that the courts in England do. Therefore,
the contracts of indemnity in India include promise, express and implied, to indemnify a
person from loss caused by accidents or events which are caused due to reasons other than the
conduct of the promisor or a third person. The right to indemnity and the obligation or duty to
indemnity may result from either an express contract, implied contract or be imposed by law.

A contract of indemnity has to be differentiated from a contract of guarantee. A contract of


guarantee is a tripartite agreement, involving the principal debtor, creditor and the surety
(guarantor), whereas a contract of indemnity has only two parties, namely the promisor and
the promisee.12

Implied contract of indemnity

A right to indemnify may arise from contract whether is express or implied. In the case of
secy of state v. Bank of India Ltd13. A note with forged endorsement was given to bank
which received it for value in good faith. The bank sent it to the public debt office for

9
mulla
10
mores
11
AIR 1942 Bom 302
12
Mulla & Pollack law of contract, p 1738
13
(1938)175 (PC)

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renewal in their name. The true owner of note recovered the compensation from the state and
the state was allowed to recover from the Bank on an implied promise of indemnity.14

Indemnity otherwise than under contract ie, the right to indemnify is not confined to cases of
contract. It exists where the relation between the parties is on the basis of law or on the basis
of equity, conscience thereof. There is an obligation of one party to indemnify the other.15

In this regard, a proper construction of the terms of the contract is essential. The main
purpose of construction and interpretation of a contract of indemnity is to ascertain and give
effect to the intention of the parties. While interpreting the indemnity clause in a
business contract, care should be taken so as to give the meaning to the terms and phrases
according to the common parlance used in that business rather than resorting to other means
of interpretation, unless such construction leads to absurdity. The extent of liability under
a contract of indemnity depends on the nature and terms of the contract, and each case must
be governed by its own facts and circumstances. I16nterpretation of the contract or clause of
indemnity thus plays a crucial role in fixing the liability.

Indemnity under statutes

Indemnity is not just a contractual right. It also exists under statutes in specific cases, when
there is an obligation upon one party to indemnify the other. Sections 222 and 223 of the
Indian Contract Act provide for the indemnification of the agent by the principal (employer).
Under Section 62 of the Companies Act, 1956, the directors of a company are liable to
indemnify the person whose name appears in the prospectus as a director, but has not given
his consent to be a director, or to the issue of prospectus, or has withdrawn his consent and
for other reasons enumerated in the Section. The second proviso to Section 108 (1) of the
Companies Act provides that a company may require the applicant to give indemnity as may
be prescribed for registering the transfer of shares where the share certificates have been lost.
Section 45A of the Negotiable Instruments Act provides that where a bill of exchange has
been lost before it is overdue, the person who was the holder of it may apply to the drawer to
give him another bill of the same tenor, giving security to the drawer, if required, to
indemnify him against all persons whatever in case the bill alleged to have been lost shall be

14
Avtar singh law of contract, p 585
15
K.M. Rm. Kuppan Chettiar alias Kadiresan Chettiar v. Sp. R.M. Rm. Ramaswamy Chettiar and another,
16
www.manupatra.com , article indemnity, accssed on 10 Nov. 12

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found again. On the sale of shares in company, the transferee is bound to indemnify the
transferor future calls, whether made by the company or liquidator. Provisions as to
indemnity are found in several other legislations. Whereas s13 of Partnership act, 1932
provides that A partner is also liable to indemnify the firm for any loss cased to it by his
wilful neglect in the conduct of the business of the firm. With other provisions thereof in the
act17

Commencement Of Liability Under Contract Of Indemnity

A important question in this connection is when does the indemnifier become liable to pay, or
when is the indemnity-holder entitled to recover his indemnity. The original English rule was
that the indemnity was payable only after the indemnity holder had suffered actual loss by
paying the claim. The maxim was you must be damnified before you can claim to be
indemnified. No action could be maintained under the English Common Law until actual
loss had been incurred. But with passage of time and development of the law, it was realised
that the indemnity may be hardly of any use if the indemnified had to pay the damages first
and only then recover the same from the indemnifier, since the former may not be in a
position to pay in the first place. Therefore the rigour of Common law was mitigated
subsequently. The Kings Bench differed from the traditional view in Redemption Richardson,
Ex Parte The Governors of Stamp Thomass Hospital18where it was held that indemnity
requires that the party to be indemnified shall never be called upon to pay. Another authority
on this principle is the judgment of Kennedy LJ in the case of Re Law Guarantee Trust and
Accident Society Ltd., Liverpool Mortgage Insurance Co.19

There have been conflicting decisions of the High Courts in India as regards the
commencement of liability of the indemnifier. In the case of Gajanan Moreshwar Parelkar
v. Moreshar Madan Mantri20 The principle was endorsed by the Bombay High Court where
Chagla J. detailed the history and development of the Common Law on indemnity and held
that if the indemnified had incurred a liability and that liability is absolute, he is entitled to
call upon the indemnifier to save him from that liability and pay it. So the indemnifier is
liable as soon as a clear enforceable claim comes into existence. In Khetpal Amarnath v.

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18
(1911) 2 K.B. 705.
19
www.manupatra.com
20
AIR 1942 Bom 302

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Madhukar Pictures21, the High Court of Bombay opined that Even before damage is incurred
by the indemnity-holder, it would be open to him to sue for the specific performance of
the contract of indemnity, provided of course it is shown that an absolute liability has been
incurred by him and that the contract of indemnity covers the said liability. the person
entitled to the indemnity may enforce his right as soon as his liability to the third party has
arisen, and therefore he may obtain relief before he has actually suffered loss. in dealing with
the rights and obligations flowing from a contract of indemnity, the Court must always ask
itself whether the indemnified party has incurred a liability, and if it shown that liability has
been incurred and is absolute, then he has a cause of action to call upon the indemnifier to
save him from that liability and to meet that obligation.

The high court of Calcutta in its well known decision in Osman Jamal & Sons Ltd v. Gopal
purshotham22 followed this principle . a company was acting as the commission agents of the
defendant firm and in that capacity bought certain goods for the defendants which they failed
to take. The supplier became entitled to recover from the company certain sum of money as
damages for breach. The company went into liquidation before the claim. It was held that the
official liquidator could recover the amount even though the company had not actually paid
the vendor. The court, however, directed that the amount should be set apart so that it is used
in full payment of the vendor in respect of whose contract the company had incurred liability.

Even, Law commission of India in its 13th report also accepted the the view that to
indemnify does not mean to reimburse in respect to money paid but to save from the loss in
respect of liability against which the indemnity has been given , and also recommended to
add a section to the contract act specifying the rights of indemnity holder and the remedies
available to him even in cases when is not sued,23

In case the contract of indemnity is a conditional contract, whether express or implied, the
commencement of liability of the indemnifier to pay begins only after the condition is
fulfilled.

21
AIR 1956 Bom 106
22
1928 ILR 56 Cal 262
23
mulla

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2.0 Insurance: features and distinctiveness

The basic purpose of the insurance contract isor should beto restore the insured to the
same economic position as before the loss. According to Chitty on contract, A contract of
insurance is one whereby one party(the insurer) undertakes to pay money or provide
corresponding benefits to or for the benefit of the other party (assured) upon happening of an
event which is uncertain, either as to whether it has or will occur at all, or as to time of the
occurrence, where the object of the assured is to provide against loss or compensate for
prejudice caused by the event, or to make provision for some identified contingency, such as
assureds old age or benefit of others on his death. It is these objectives which distinguish
insurance from gaming or wagering. When embodied in a document the contract is usually
called a policy.24

Under the contract act, 1872

Almost all insurances other than life and personal accident insurance are contract of
indemnity. The insurers promise to indemnify is absolute one. A suit can be filed
immediately upon failure of performance, irrespective of actual loss. If indemnity holder
incurred liability and liability is absolute then he would be entitled call upon the indemnifier
to save him from that liability by paying it off.25

In Mulla and Pollack, A contract of indemnity would not include a contract of insurance
against loss or damage to the subject matter of the insurance whereas contracts of insurance
protect the insured against liability to third persons. In the case of insurance, there is a legal
and not equitable right on the part of assured to claim under the policy as soon as the event
insured against arisen, and it is immaterial that he has not discharge the liability against the

24
Chitty on conracts, by Joseph Chitty, 30th edition, p 1258
25
New india assurance co. ltd v. stae trading corpn of India, AIR 2007 GUJ : Avtar singh, p586

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third party.26 Going by the definition under the Act a contract of insurance covering the losses
sustained due to damage to the concerned subject matter is not a contract of indemnity, where
the loss is caused due to a factor other than the conduct of a person. For instance, in the
case of State of Orissa v. United India Insurance Co27, the Supreme Court of India observed
that the indemnity contemplated under the Section 124 of the Indian Contract Act does not
include contracts of marine insurance, since the loss contemplated under marine insurance is
not caused by the insurer or any other person. There have been instances where the validity of
an indemnity clause was challenged in the light of the said definition. The Courts have upheld
the validity of such indemnity clauses by resorting to other provisions of the same Act. A
contract of Indemnity is a contract by which one party promise to save the other from loss
caused to him by the conduct of any other person as contemplated in Section 124 of the
Indian Contract Act. But indemnity, as applicable to marine insurance, must not be an
indemnity, as contemplated by the Indian Contract Act, as the loss in such a contract is
covered by the contract itself and such loss is not caused to the assured by the conduct of the
insurer nor by the conduct of any other persons. Brett. L.J., observed, with regard to this
indemnity, thus: "this contract means that the assured, in case of loss against which the
policy has been made, shall be fully indemnified, but shall never be more than fully
indemnified. That is the fundamental principle of insurance, and if ever a proposition is
brought forward which is at variance with it, that is to say, which either will prevent the
assured from obtaining a full indemnity, or which will give to the assured more than a full
indemnity, that proposition must certainly be wrong."

In the case of State Bank of Saurashtra vs Ashit Shipping28 (2002), the Supreme Court of
India has held, whilst considering an indemnity bond, that the question of making good the
loss arises only when there is proof that loss is suffered. In cases of insurance (which is
again an indemnity contract, in a broader sense), the Supreme Court of India has held that it
is only upon proof of the actual loss, that the assured can claim reimbursement of the loss to
the extent it is established (this becomes important given the recently increasing phenomenon
of indemnity insurance relating to acquisition contracts insurance policies indemnifying
the indemnifier). The observations in these cases raise a concern as to whether the practical
effect of an indemnification right, in an enforcement scenario, would be much different -
either substantively or procedurally - from the contractual right to damages

26
Re law gurantee trust and aaccident society ltd.
27
AIR 1997 SC 2670
28
AIR 2002 SC 1993

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2.2 Indemnity insurance

Most of the contracts of insurance are contracts of indemnity, whereby the insurer agrees to
compensate the assured for the loss that the latter may sustain through the happening of the
event upon which the insurers liability may arise.29 If the object of the contract is
indemnification(that is, the insurers obligation does not arise unless and until the assured has
sustain a loss), the contract remains one of indemnity even if it quantifies in advance the
value of potential loss.

2.3 Distinctiveness between indemnity insurance and contingency insurance.

If a contract is one of indemnity insurance, there at least three difference as opposed to


contingency insurance. The assured is entitled only to compensation to is loss. He is not
entitled to receive or retain any benefits which result in the assured being over-compensated.
secondly, the assurers cause of action against the insurer arises upon the assured suffering
the loss in question. Thirdly, if the insurer refuses or fails to pay an indemnity as required by
the contract, the insurer will not be liable for the assured for any damages above and beyond
the amount of indemnity, as it is itself a damage.30

31 2.4 Contingency insurance

Contracts such as life insurance and certain accident insurances providing for the payment of
a specified sum upon the happening of event or accident and it is not a contract of indemnity.
They are often describes as contingency policies and they do not contain attributes of
contracts of indemnity. The insurers liability to provide the specified benefit to the assured is
generally not dependent on the assured suffering a loss which is the equivalent in value of the

29
Castellain v. preston (1883) 11 QBD 380
30
Chitty on contract, 30th edtition, p1259
31
Ibid p1260

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specified benefit. Accordingly, the doctrine of indemnity, and related doctrines such as
subrogation, salvage and contribution, will not apply to the contingency policies.

The Law Commission of India, in its Thirteenth Report published in the year 1958 had
recommended that the definition of indemnity under Section 124 of the Indian Contract Act
be amended as follows: A contract by which one party promises, expressly or impliedly, to
save the other from loss caused to him by the conduct of the promisor himself, or by the
conduct of any other person or by an event not depending on such conduct. But this
recommendation has not been implemented so far by the Indian Parliament.32

2.5 Characteristics of insurance contract


1. As a risk distributing device: The device of insurance serves to distribute the risk of
economic loss among as many as possible of those who are subject to the same kind of risk.
This broad sharing of economic risk is the principle of risk-distribution.
1. 33Uberrimae fides contract: A contract requiring perfect good faith. It requires the parties
to the contract of insurance to disclose any material fact, which the applicant knows, or which
he ought to know. Misrepresentations and Concealments should be avoided. When an insurer
considers accepting a risk, it must have accurate and complete information to make a
reasonable decision. Should the insurer assume the risk and, if so, under what terms and
conditions? Because insurance involves a contract of uberrimae fidei, or utmost good faith,
potential insureds are held to the highest standards of truthfulness and honesty in providing
information for the underwriter. In the case of contracts other than for insurance, it is
generally assumed that each party has equal knowledge and access to the facts, and thus each
is subject to requirements of good faith, not utmost good faith. In contrast, eighteenth-
century ocean marine insurance contracts were negotiated under circumstances that forced
underwriters to rely on information provided by the insured because they could not get it
firsthand. For example, a ship being insured might be unavailable for inspection because it
was on the other side of the world. Was the ship seaworthy? The underwriter could not
inspect it, so he (they were all men in those days) required the insured to warrant that it was.
If the warranty was not strictly true, the contract was voidable. The penalty for departing
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from utmost good faith was having no coverage when a loss occurred. Today, the concept

32
Mulla p 1740
33
Chitty on contract, 30th edition, p 1274
34
cc

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of utmost good faith is implemented by the doctrines of (1) representations and (2)
concealment
2. Personal contract: Insurance contracts are usually personal agreements between the
insurance company and the insured individual, and are not transferable to another person
without the insurer's consent.
3. Principle of subrogation: The term subrogation means stepping into the shoes of others.
The doctrine of subrogation refers to the right of the insurer to stand in the place of the
insured, after settlement of a claim, in so far as the insured's right of recovery from an
alternative source is involved. 35Recently hoble supreme court of India has summarized this
doctrine in following words as Equitable right of subrogation arises when the insurer settles
the claim of the assured, for the entire loss. When there is an equitable subrogation in favour
of the insurer, the insurer is allowed to stand in the shoes of the assured and enforce the rights
of the assured against the wrongdoer. (ii) Subrogation does not terminate nor puts an end to
the right of the assured to sue the wrong-doer and recover the damages for the loss.
Subrogation only entitles the insurer to receive back the amount paid to the assured, in terms
of the principles of subrogation. (iii) Where the assured executes a Letter of Subrogation,
reducing the terms of subrogation, the rights of the insurer vis--vis the assured will be
governed by the terms of the Letter of Subrogation. (iv) A subrogation enables the insurer to
exercise the rights of the assured against third parties in the name of the assured.
Consequently, any plaint, complaint or petition for recovery of compensation can be filed in
the name of the assured, or by the assured represented by the insurer as subrogee-cum-
attorney, or by the assured and the insurer as co-plaintiffs or co-complainants. (v) Where the
assured executed a subrogation-cum-assignment in favour of the insurer (as contrasted from
a subrogation), the assured is left with no right or interest. Consequently, the assured will no
longer be entitled to sue the wrongdoer on its own account and for its own benefit. But as the
instrument is a subrogation-cum-assignment, and not a mere assignment, the insurer has the
choice of suing in its own name, or in the name of the assured, if the instrument so provides.
The insured becomes entitled to the entire amount recovered from the wrongdoer, that is, not
only the amount that the insured had paid to the assured, but also any amount received in
excess of what was paid by it to the assured, if the instrument so provides course.

.
4. Unilateral

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Insurance contracts are unilateral; the insured performs the act of paying the policy premium,
and the insurer promises to reimburse the insured for any covered losses that may occur.
Once the insured has paid the policy premium, nothing else is required on his or her part; no
other promises of performance were made. Only the insurer has covenanted any further
action, and only the insurer can be held liable for breach of contract.

Conclusion

Indemnity is a special contract under the Indian Contract Act, 1872. The legislation is a very
well drafted one, but has given a very narrow definition of indemnity, due to which the Indian
Courts have time and again held that certain documents do not come under the purview of the
definition of indemnity contained in the Act. Such decisions have not created a problem,
since the courts covered the liability under other provisions of the same Act, mainly under
Section 31 of the Act dealing with contingent contracts. Indemnity is also different from
damages. The right to indemnity is given by the original contract whereas the right to
damages arises as a result of breach of the contract. Therefore, it would suffice to say that
though the definition of indemnity under the Indian Contract Act is narrow, the principles
regarding indemnity which has been laid down by common law are definitely addressed by
other provisions of the Act.

The distinction between indemnity on the one hand and insurance and other forms
of contract on the other hand has been clearly made by the Courts. Also, the law regarding
the commencement of liability of the indemnifier is fairly well settled, although there is no
decision of the Apex Court on the matter. The decision of the Bombay High Court in this
regard about sums it up.

18
Bibliography :

Primary sources

The Indian contract Act, 1872

13th law commission report, 1958

Secondary sources

Avtar singh, Contract and Specific relief Act, 10th edition, EBC, 2011.

Mulla & Pollack, Law of Contract

Joseph Chitty, Chitty on contract

Webography

www.manupatra.com

Articles accessed on on www.manupatra.com ,titlted indemnity

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