Contracts II Final Project

CHANAKYA NATIONAL LAW UNIVERSITY
The Final draft for the fulfilment of project of Law of Contracts II

On
“CONTRACT OF INDEMNITY AND INSUARANCE”
Submitted to:-Mr. Vimal Kumar

Faculty of Law of Contracts II
Submitted by: - Harshit Gupta
Roll no.1623
2nd Year B.B.A.L.L.B (Hons)
CONTENTS
ACKNOWLEDGEMENT........................................................................3
RESEARCH METHODOLOGY.............................................................4
1. INTRODUCTION...............................................................................5
2. CONTRACT OF INDEMNITY..........................................................7
(a) Definition and Nature.......................................................................7
(b) Rights of Indemnity Holder............................................................11
(c) Rights of Indemnifier.....................................................................12
(d) Contract of Indemnity, when enforceable......................................12
3. CONTRACT OF INSURANCE.......................................................14
(a) Meaning and Nature.......................................................................14
(b) Essentials........................................................................................14
4. DIFFERENCES BETWEEN CONTRACT INSUARANCE AND
INDEMNITY..........................................................................................18
5. CONCLUSION.................................................................................22
6. BIBLIOGRAPHY.............................................................................24
ACKNOWLEDGEMENT
Writing a project is one of the most difficult academic challenges I have ever faced. Though this
project has been presented by me but there are many people who remained in veil, who gave
their support and helped me to complete this project.
First of all I am very grateful to my subject teacher Mr. Vimal Kumar without the kind support
of whom and help the completion of the project would have been a herculean task for me. He
took out time from his busy schedule to help me to complete this project and suggested me from
where and how to collect data.
I acknowledge my friends who gave their valuable and meticulous advice which was very useful
and could not be ignored in writing the project. I want to convey most sincere thanks to my
faculties for helping me throughout the project.
RESEARCH METHODOLOGY
This project is based upon doctrinal method of research. In many areas non-doctrinal method is
also used.
This project has been done after a thorough research based upon intrinsic and extrinsic aspects of
the project.
Sources of Data:
The following secondary sources of data have been used in the project-
1. Articles.
2. Books
3. Journals
4. Websites
5. Research Papers
Method of Writing:
The method of writing followed in the course of this research project is primarily analytical.
Mode of Citation:
The researchers have followed a uniform mode of citation throughout the course of this project.
1. INTRODUCTION
According to the Law Lexicon indemnity is defined as “the obligation or duty resting on one
person to make good any loss or damage another has incurred while acting at his request or for
his benefit”.
Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an
exemption from liability for damages.
The concept of indemnity is based on a contractual agreement made between two parties, in
which one party agrees to pay for potential losses or damages caused by the other party. A
typical example is an insurance contract, whereby one party (the insurer, or the indemnifier)
agrees to compensate the other (the insured, or the indemnity holder) for any damages or losses,
in return for premiums paid by the insured to the insurer.1
An insurance contract is a document representing the agreement between an insurance

company and the insured.
Insurance is the guard against uncertain losses. An insurance policy will be taken by an
individual who wishes to guard themselves against the occurrence of a specific event and the
losses that may follow by making a periodic payment to an insurance company called an
insurance premium.2 In case the event occurs the insurance company will compensate the
insurance policy holder, restoring their financial standing back to the position it was before the
loss occurred. Therefore, taking out an insurance policy is essentially transferring a risk from one
party to another in exchange for a payment made.
Insurance is taken out against a variety of risks; some forms of insurance include vehicle
insurance, health insurance, life insurance, home insurance, credit insurance, etc. An example of
insurance is vehicle insurance, where in case the insurance policy holder faces an accident and
his vehicle gets damaged, he will be paid compensation for damages to his vehicle, so that his
vehicle can be restored.
1
https://kanwarn.wordpress.com/2010/11/25/indemnity-under-indian-contract-act-1872-part-2/
2
https://www.lawctopus.com/academike/indemnity-agency/
2. CONTRACT OF INDEMNITY
(a) Definition and Nature

Indemnity is mentioned in Section 124 of Indian Contract Act as “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.” 3
Illustration
3
(1) A contracts to indemnify B against the consequences of any proceedings which C may
take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
(2) A contracts to indemnify B against the consequences of any proceedings which C may
take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity."
Indemnity can be treated as a sub-species of compensation and a Contract of Indemnity is a

species of contracts. The obligation to indemnify is a voluntary obligation taken by the
indemnifier.
Mere possibility of loss occurring will not make the indemnifier liable. Loss to the indemnity
holder is essential, otherwise, the indemnifier cannot be held liable. Plus, the loss must arise due
to the conduct of the indemnifier or any other person related. Strictly speaking this does not
cover the acts of God; otherwise various insurance transactions will be rendered untenable.
Under Indian law, the definition of contract of indemnity is restricted to cases wherein the loss is
caused by human agency. Losses from other causes are covered in other chapters of the Indian
Contract Act, 1872.
Contract of Indemnity should have all the essentials of a valid contract like free consent, legality
of object, etc. Consideration in this case can be anything done, or any promise made which
serves as motivation behind the contract. It is sufficient inducement that the person for whom the
indemnifier has promised indemnity has received a benefit or that the indemnity holder has
suffered an inconvenience of doing what the indemnifier asks. A contract of indemnity is one of
the species of contracts.
ADAMSON vs. JARVIS 4
FACTS: Adamson was an auctioneer who was given cattle by Jarvis to be sold at an
auction. Adamson followed the instructions and sold the cattle. But Jarvis was not the
owner of the cattle. The real owner of the cattle sued Adams for conversion and was
successful. Adamson had to pay damages and he then sued Jarvis to be indemnified for
the loss that he suffered by way of damages to be paid to the real owner.
4
[1827] 4 BING 66
HELD: Adamson carried out Jarvis’s instructions and was entitled to presume that if
anything went wrong as per instructions, he would be indemnified. Jarvis was ordered to
pay damages to Adams.
Indemnity, as per English Law, is a promise to save another harmless from the loss caused as a
result of a transaction entered into at the instance of the promisor.5 It is not necessary under
English law that the loss be due to the conduct of a person; the loss could be caused by accidents
or forces beyond one’s control. Thus, the scope of application under English law of indemnity is
wider.
The Law Commission of India recommended expansion of scope of law of indemnity in its 13th
Report but no amendment has been made executing the same.
A contract of Indemnity may arise by:
a) Express Promise. There can be an agreement between parties to indemnify one party.
b) Operation of Law. Under Section 145 of the ICA, 1872 if the surety pays the creditor, the
principal debtor in lieu of whom the surety had to pay has to indemnify the surety.
Similarly, under Section 13 of the Indian Partnership Act, 1932 a firm is bound to indemnify an
agent who suffers a loss by doing a lawful act of the firm. There are provisions in the Negotiable
Instruments Act, 1938 as well as Indian Companies Act, 1952.
In GAJAN MORESHWAR vs. MORESHWAR MADAN6, it was decided that law relating to
indemnity is by no means exhaustive and thus, the Courts in India shall follow the English Law.
In the same case, English equity law was discussed; whether requiring an indemnity holder to
actually pay and clear the damages before claiming them from the indemnifier places an undue
burden on the indemnity holder. Thus, if the liability of an indemnity holder became absolute, he
was held entitled to get the indemnifier to pay off the claim or to pay the court sufficient amount
of money for making a fund to pay the claim as and when it was made.
5
6
AIR 1942 BOM 302
The contract of indemnity is an actionable claim. Of course, it must not be against public policy
or unlawful to valid.7 If a contract of indemnity for indemnifying bail in a criminal case is
invalid. For example, if A publishes a libel at the request of B and suffers damage due to such
publication, A cannot sue B to indemnify him.
A right of indemnity exists where one party is obliged to make good certain losses suffered by
the other party.8 The losses which the indemnifying party must make good will depend on the
wording of the indemnity.
No third person or a stranger to the contract of indemnity cannot sue the indemnifier due to the
principle of privity of contract as decided in the case of NATIONAL PETROLEUM COMPANY
vs. POPATL LAL9 by the Bombay High Court.
Generally, a contract of insurance is not treated as a contract of indemnity in India. But contracts
of marine insurance, fire insurance or motor insurance are deemed to be contracts of indemnity.
The reasoning offered is that a life insurance as a contract does not offer to make good a loss but
offers a particular sum of money upon the death of the policy holder. But when we look at
policies where a policy is taken by a creditor on the principal debtor, he becomes entitled to an
exact amount of money. Thus, courts look deeply into the terms and conditions of contracts in
such cases.10
GAJAN MORESHWAR vs. MORESHWAR MADAN11
FACTS: G Moreshwar got a plot in Bombay for a long lease period. He transferred the
lease to M Madan for a limited period. M Madan started construction over the said plot
and got his supplies from a K D Mohan Das. When Mohandas asked for payment, the
defendant could not pay up. Upon request of M Madan, G Moreshwar executed a
mortgagee deed in favor of K D Mohan Das. Mohandas, the supplier. Interest rate was
decided and G Moreshwar put a charge over his properties. A date was set for the return
of the principal amount. M Madan had agreed to pay the principal amount, the interest
7
8
9
(1936) 38 BOMLR 610
10
Contract act and specific relief, 12th edition Avtar singh
11
1942 BOM 302
and to get the mortgage deed released before a certain date. M Madan did not pay
anything to K D Mohan Das; it was G Moreshwar who paid some interest. When despite
repeated request, M Madan did not pay the principal amount, interest or get the mortgage
deed released, G Moreshwar sued him for indemnity.
HELD: The Privy Council did not accept M Madan’s stance that G Moreshwar had
suffered no loss and thus could not claim anything under Sections 124 and 125. The
Council held that an indemnity holder has rights other than those mentioned in the
Sections above. If the indemnity holder has incurred a liability and the liability is
absolute, he can turn to the indemnifier to take care of the liability and pay it off. Thus, G
Moreshwar was entitled to be indemnified by M Madan against all liability under the
mortgage and deed of charge.
A contract of indemnity identifies the parties, describes the types of losses covered and clarifies
whether legal expenditure in the filing or fighting a suit is included12. Generally, the contract
will also make clear the ‘triggering event’; happening of which will make the indemnifier liable.
The triggering events are described with help of terms like “arise out of”, “in connection with,”
or “occasioned by”, “acts or omissions” or “negligence.” The contract also makes clear the
extent of indemnification due.
(b) Rights of Indemnity Holder

The rights of the indemnity holder are dependent on the terms of the contract of indemnity as a
general rule.13 Section 125 of the Indian Contract Act, 1872 comes into play when the indemnity
holder is sued i.e., under specific situation.
The indemnity holder is entitled to recover the:
a) All the damages that he may have been compelled to pay in any suit in respect of any matter
to which the promise of the indemnifier applies.
12
13
For example, if A contracts to indemnify B against the consequences of any proceedings which
C may take against B in respect of a particular transaction. If C does institute legal proceeding
against B in that matter and B pays damages to C, A will be liable to make good all the damages
B had to pay in the case.
b) all the costs of suits that he may have had to pay to the third party provided he acted as a
man of ordinary prudence and he did not act in contravention of the directions of the indemnifier
or if he had acted under the authority of the indemnifier to contest such a suit.14
In the case of ADAMSON vs. JARVIS [1827] 4 BING 66, Adamson was entitled to recover the
money he had to pay to the true owner of the cattle as well as any expenses incurred by him to
get a legal counsel, etc.
c) All the sums that he may have paid under the terms of any compromise of any such suit
provided such compromise is not contrary to the indemnifier’s orders and was a prudent one or if
he acted under authority of the indemnifier to compromise the suit.
The indemnity holder is also entitled to losses due to change of law not foreseen by the parties
when they entered into such contract of indemnity.15
(c) Rights of Indemnifier

The rights of the indemnifier have not been mentioned expressly anywhere in the Act. In
JASWANT SINGH vs. SECTION OF STATE16, it was decided that the rights of the indemnifier
are similar to the rights of a surety under Section 141 where he becomes entitled to the benefit of
all securities that the creditor has against the principal debtor whether he was aware of them or
not. Where a person agrees to indemnify, he will, upon such indemnification, be entitled to
succeed to all the ways and means by which the person originally indemnified might have
protected himself against loss or set up his compensation for the loss.17
14
15
16
14 BOM 299
17
The principle of subrogation i.e., substitution is founded in equitable principles. Once the
indemnifier pays for the loss or damage caused, he will step into the shoes of the indemnified.
18
Thus, he will have all the rights with which the original indemnifier protected himself against
loss or damage. The principle of subrogation is applicable due to both the ICA, 1872 itself and
principles of equity.
(d) Contract of Indemnity, when enforceable

In England, under common law, it was essential for an indemnity holder to first pay for the
losses and then claim indemnity.19 With time, Court of Equity softened the law and in 1911 with
the RE: RICHARDSON, EX PARTE THE GOVERNORS OF ST THOMAS HOSPITAL case,
indemnity before payment by the indemnity holder was made the norm. Further in 1914, in the
case of RE LAW GUARANTEE & ACCIDENTAL case20, it was stated that ‘to indemnify does not
mean merely to reimburse with respect to the money paid but to save from loss with respect to
liability for which indemnity has been given’. A Contract of indemnity would serve little purpose
if the indemnity holder was made liable in the first instance. What if he is unable to meet the
claim in the first instance?
In India, there is no specific provision which states when a contract of indemnity is enforceable.
There have been confliction judicial decisions throughout. OSMAL JAMAL & SONS LTD vs.
GOPAL PURUSHOTHAM21, was amongst the first Indian cases where right to be indemnified
before paying was recognised. But now, a consensus of sorts has been formed in favour of the
opinion of Equity Courts. In K BHATTACHARJEE vs. NOMO KUMAR22, SHIAM LAL vs.
ABDUL SALAL23 and GAJAN MORESHWAR CASE24, it has been decided that the indemnified
may compel the indemnifier to place him in a position to meet liability that may be cast upon
him without waiting until the promisee (indemnified) has actually discharged it.
18
19
Legal Studies Research Paper No. 11/41 August 2011 The Nature of Contractual Indemnities ,Wayne Courtney
20
21
[1728] ILR 56 CAL 262
22
1899 26 CAL 241
23
1931 ALL 754
24
Indemnity requires that the party to be indemnified shall never be called upon to pay.25 Thus, the
liability of the indemnifier commences the moment the loss in form of liability to the
indemnified becomes absolute.26
3. CONTRACT OF INSURANCE
(a) Meaning and Nature

The fundamental principle of Insurance is mathematical; its application is financial; and its
interpretation is legal.27 For the layman to understand the Insurance principle he should be an
actuary (who design and price the insurance products); to understand its application to financial
problems, he need not be a financial; and to understand its legal concepts, he need not be a
lawyer. 28The subject of Insurance covers a vast array of topics. This and the following chapters
are concerned with these topics. Insurance may be defined as a contract between two parties
whereby one party called insurer undertakes in exchange for a fixed sum called premium to pay
the other party called insured a fixed amount of money after happening of a certain event.
Insurance policy is a legal contract & its formation is subject to the fulfillment of the requisites
of a contract defined under Indian Contract Act 1872. According to the Act “A Contract may be
25
26
27
https://www.thecsclubindia.com/contract-of-insurance-definition-and-its-types/
28
www.freelegaldictionary.com
defined as an agreement between two or more parties to do or to abstain from doing an act, with
an intention to create a legally binding relationship. “Since Insurance is a contract, certain
sections of Indian Contract Act are applicable.
(b) Essentials
1. Offer & Acceptance:

In Life Insurance an offer can be made either by the Insurance company or the applicant
(proposer) & the acceptance will follow. e.g., subsequently
(a) An offer made by the Insurance company to proposer that the premium amount will be
Rs.100/- per annum for the Insurance amount of Rs.1000/-. It is for the proposer to accept the
offer or not.
(b) An advertisement in the newspaper about the availability of different life Insurance policies is
an invitation for an offer. If a proposer makes an application then it will be offer from the
applicant and the Insurance company may or may not accept it.
(c) An offer may be considered accepted either when the Insurance company issues the policy or
the first premium is paid by the applicant. 29
As stated above in example (a) if the applicant pays the first premium of Rs.100/- to the
Insurance company then the contract is completed as both the parties have accepted the offer.
Similarly, if the company issues the policy in above stated example (b) then the offer is accepted
by the Insurance company & the contract is completed. In fact, in life Insurance contract the
effective date of the policy is very important; when the premium is paid with the application but
no conditional receipt is issued the contract is not in force until the policy is delivered to the
applicant. The payment of the premium with the application constitutes the offer and the delivery
of policy is its acceptance. Further, if the premium is paid with the application & conditional
receipt is issued, the effective date of the contract depends upon the provisions of the conditional
receipt.
There are three types of conditions as follows:
29
Legal Contract, Legal Agreements, Contracts and Forms. (2010). Principles of Contract Law.
(a) The condition may be that the Insurance becomes effective as of the date of the application or
medical examination whichever is later.30 A claim arising after this date will be paid even if the
application papers have not reached the competent / Approving Authority, provided of course,
that the facts on the application & the results of the medical examination are such that the
company would have accepted the application had the applicant lived.
(b) The second type of conditional receipt used by a company is the approval form, which
provides coverage beginning with the date the application is approved by the company. This
form does not offer the insured protection for the period from the date of the application until it
is approved by the company.
(c) A third type of receipt is the unconditional binding receipt. According to this receipt the
company binds the Insurance from the date of the application until the policy is issued or the
application is rejected. The companies using this type of receipt place a time limit usually from
30 to 60 days. This binding receipt is beneficial to the prospects because he becomes insured
from the time the application is filed. This form of receipt is not widely used.
The offer or proposal and its acceptance may be verbal or in writing but in Insurance contracts
these are in writing. In General Insurance the Insured offers to purchase an insurance from the
Insurer and this offer is in the form of a proposal form and the Insurer after studying the proposal
can either reject the proposal or accept it. In case he accepts he issues a cover note or a letter of
acceptance. In the latter event the acceptance letter becomes a counter offer or proposal, which is
accepted on payment of premium by the insured.
2. Consideration:
There is no validity of a contract if there is no consideration, which is the act or promise offered
by one party and accepted by the other as the price of his promise.31 In Insurance contracts the
consideration is the premium that the Insured pays to the Insurer as the price of the promise that
the Insurer has made that he shall indemnify the insured. Hence premium payment is the
consideration on part of the insured and the promise to Indemnify is the consideration on part of
the Insurer.
30
31
3. Legal Capacity to Contract or Competency:
For an agreement to be binding on all parties, the parties involved must have the legal capacity to
enter into a contract. With respect to the insurer, if the company is formed as per laws of the
country & empowered to solicit insurance then the insurer is capable of entering into an
agreement.32 With respect to the insured, the person should be of legal age i.e. 18 years and of
sound mind. If a contract is made with an underage the application may be held unenforceable if
the minor decides to repudiate it at a later date. In Insurance contract the insurer is bound by the
contract as long as the underage wishes to continue it. If the minor repudiates his contract, the
law will allow him a refund of all premium paid. Insanity or mental incompetence precludes the
making of a valid Insurance contract.
4. Consensus “ad idem” (Same mind):

The understanding between the insurer & insured person should be of same thinking or mind.
The reasons for taking the Insurance policy should be understandable to both the parties. Both
parties to the contract should be of the same mind and there must be consent arising out of
common intention.33 Both parties should be clear about what the other is saying. The Insurer
should know what the insured wants and the insured should know what the insurer is offering
and both should be agreed on this. For example, if an Insured seeking a fire policy is issued a
burglary policy there is no consent arising out of common intention.
5. Legality of Object:
To be a valid, a contract must be for a legal purpose & not contrary to public policy. Insurance is
legal business therefore it cannot be illegal on the part of the insurer. An individual can take the
life Insurance of his own life or his/her family members. If an individual takes a policy on the
life of an unknown person it will not be a valid contract as it will amount to gambling. Another
example is that the contract will not be legal if it has anything to do with stolen property or if it is
in respect of any unlawful activity. Hence Insurance of stolen goods or the Insurance of
smuggling operation shall not stand scrutiny in the court of law and such contracts will be void.
32
33
4. DIFFERENCES BETWEEN CONTRACT INSUARANCE
AND INDEMNITY
Varying Scopes of Protection
While insurance is often considered a “backstop” to indemnity, it does not necessarily follow
that the scope or nature of the insurance protection is coextensive with or limited to that provided
by indemnity34. Rather, insurance can provide protection under terms that are either broader or
more restrictive than that provided under the indemnity provision.35
Unlike typical indemnity provisions which can, subject to legislative limitations, provide
protection against almost any loss bearing a sufficient connection to the indemnitor’s activities,
the coverage provided by commercial general liability policies are generally limited to bodily
injury and property damage and numerous exclusions further limit the protection provided.36
As one example of the differing scope between a typical indemnity provision and the insurance
provided by a CGL policy, a contractor will likely be indemnified by an at-fault subcontractor
for a pure delay claim brought by an owner, but unless there is bodily injury or property damage
34
35
36
http://www.lawyersclubindia.com/articles/Is-Contract-of-Insurance-a-contract-of-indemnity--3538.asp
it is unlikely that the contractor would have insurance coverage for that same claim. Another
possibility is situations in which the indemnity agreement obligates the indemnitor to assume
contractual responsibilities going beyond those imposed by an ordinary tort standard of care.
Under these circumstances, an insurer might claim that coverage is barred by the breach of
contract exclusion common to CGL policies.
If there is concern that a critical subcontractor may not have sufficient resources to honor the full
breadth of its indemnification obligations, CGL insurance therefore would not be an effective
“backstop.” Obtaining “additional insured” status under the subcontractor’s CGL policies would
not change that result, as the fundamental issue is a lack of coverage under the CGL policy.
One option for addressing this risk is the surety bond. While categorically different than
insurance policies, surety bonds can offer protection against, among other items, pure delay and
other risks generally not covered by CGL policies. Protections may be limited by the terms of the
bond, however, and even when expressly encompassed within the scope of the bond there can be
substantial delays and litigation required to effectuate performance. That is not always the case,
however, and sureties often provide timely performance under a payment bond claim or when
hiring a completing contractor.
Parties are increasingly looking to subcontractor default insurance (SDI or Subguard)[2] to

address the risks associated with the default of a subcontractor, including those not covered
under CGL policies37. While SDI typically provides for interim payments which can address the
delay in receiving the protection contemplated by surety bonds and insurance policies, SDI is not
without limitations. Among others, SDI can be difficult for some contractors to obtain and
coverage for liquidated damages, delay and other costs is often subject to restrictive sublimits.
The foregoing discussion addresses situations in which the protection provided by third-parties is
nominally more restrictive than that provided by indemnity, but that relationship is not always
present. Indeed, due to “anti-indemnification” legislation passed in most jurisdictions, it is
increasingly common for the indemnity terms to be less inclusive than the available protection
37
from third-parties like insurance companies.38
The issues raised by this type of relationship can be complex, as some states’ “anti-
indemnification” laws purport to limit insurance coverage to those situations in which indemnity
can legally be negotiated. Even when there is no legislative restriction on the scope of coverage,
courts have in certain circumstances looked to the underlying indemnity agreement rather than
the terms of the policy itself to delineate the scope of protection provided. Accordingly, parties
cannot necessarily assume that insurance coverage that is nominally broader than the underlying
indemnity provision will ultimately perform as intended.
Timing of Performance
While insurance and other third-party protection is often perceived as a “backstop” for
indemnity, there is no hard-and-fast requirement that a party first pursue indemnification. Rather,
in certain circumstances, the indemnitee can bypass the indemnitor and seek protection directly
from the insurer or other third-party indemnitor. Three such circumstances were mentioned
above — “additional insured” status under a CGL policy, SDI and surety bonds.39
The ability to seek performance directly from the third-party has significant benefits. For one, it
increases the number of potential sources of funds. Thus, if the contractor is insolvent or has
taken a very hard position on the claim, there is the possibility of a solvent, more malleable party
from whom to recover. And, as discussed below, it is more likely that the third-party will present
a better source of recovery.40
Second, the nature of the third-party obligation in those circumstances is often more favorable.
With SDI, for example, there is often the opportunity to submit interim proofs of loss to receive
funds to address the default, which is an option that is rarely available under an indemnity
provision. For its part, status as an “additional insured” carries the right to receive an immediate,
insurer-funded defense. While cases such as Crawford, cited above, provide that a contractor
may have an immediate obligation to defend, that result turns on the specific indemnity language
38
http://www.lawyersclubindia.com/articles/Is-Contract-of-Insurance-a-contract-of-indemnity--3538.asp
39
40
and can be difficult to achieve in practice.
Likelihood of Performance
Central to likelihood of performance are two distinct factors — the party’s willingness to pay
and its ability to pay. For a variety of reasons — including the nature of regulatory scrutiny,
differing institutional interests and differences in substantive law — there probably is, in general,
a higher likelihood of receiving payment from a third-party indemnitor (most often, an insurance
company) than a contractor. But, as discussed below, that is not always the case.
Regulatory scrutiny on insurance companies is focused heavily on solvency, and insurers as a

whole therefore are generally likely to be able to pay claims. The differing nature of insurers’
and contractors’ respective businesses also provides vastly different incentives — while an
insurer that pays a claim is merely doing what it was expected to do, payment of a claim by a
contractor can be perceived as an admission that it did something it should not have done.41
Moreover, between the insurers’ obligations of good faith and fair dealing to their insureds and
more nuanced differences in how courts interpret insurance policies versus contractual indemnity
provisions, the law also provides insurers with more incentives to pay than contractors.
That is not to say, however, that insurers are always more willing to pay. Several of the many
parties involved in significant construction projects may be insured by non-admitted insurers
with differing levels of regulatory scrutiny and/or concern for their reputation. Insurers’ claims
positions can also be driven by factors affecting the company or industry as a whole, rather than
just the merits or economics of an individual claim. Conversely, contractors are often very
mindful of their reputation within the industry and may have a strong desire to be perceived as
“standing behind their work” and, therefore, may be willing to pay even when the merits of a
particular claim do not necessarily warrant it.
41
5. CONCLUSION
Indemnity is a legal exemption from the penalties or liabilities incurred by any course of action.
An insurance payout is often called an in indemnity, or it can be insurance to avoid any expenses
in case of a lawsuit. Indemnification is a promise, usually as contract provision, protecting one
party from financial loss. This is something stated as a requirement that one party hold harmless
the other.(Hold harmless does not imply indemnification.
The first says I won’t make any claims against you and the second says I will pay the claims
against and/or your costs, etc.) Indemnification is a type of insurance which protects the one
party from the expenses of other. Indemnification clause cannot usually be enforced for
intentional tortious conduct of the protected party.
Corporate officers, board members and public officials often require an indemnity clause in their
contracts before they perform any work. In addition indemnification provisions are common in
intellectual properties. Licenses in which the licensor does not want to be liable for misdeeds of
the licensee. A typical license would protect the licensor against product liability and patent
infringement.
Insurance is the guard against uncertain losses. An insurance policy will be taken by an
individual who wishes to guard themselves against the occurrence of a specific event and the
losses that may follow by making a periodic payment to an insurance company called an
insurance premium. In case the event occurs the insurance company will compensate the
insurance policy holder, restoring their financial standing back to the position it was before the
loss occurred. Therefore, taking out an insurance policy is essentially transferring a risk from one
party to another in exchange for a payment made.
Insurance is taken out against a variety of risks; some forms of insurance include vehicle
insurance, health insurance, life insurance, home insurance, credit insurance, etc. An example of
insurance is vehicle insurance, where in case the insurance policy holder faces an accident and
his vehicle gets damaged, he will be paid compensation for damages to his vehicle, so that his
vehicle can be restored.
Indemnity and insurance explain two very similar concepts that are so alike to each other, they
are easily confused. Indemnity and insurance both explain a situation in which one party takes
measures to guard against any financial losses that maybe suffered so that, he may arrive at the
financial status he was before the event/accident occurred.
Insurance and indemnity are quite similar to each other and operate on similar concepts of
restoring the party that suffered a loss or injury back to their original position. The existence of
indemnity insurance contracts, which combine these two concepts, make understanding the
difference even more difficult. However, Insurance can be seen as a periodic payment that is
made to guard against any losses suffered, whilst indemnity is a contract between two parties for
which the injured party will receive compensation for losses.
• Indemnity and insurance both explain a situation in which one party takes measures to guard
any financial losses that maybe suffered to that he may arrive, at the financial status he was
before the event/accident occurred.
• Indemnity is the obligation that one party holds in paying compensation to another party that
suffered losses.
• Taking out an insurance policy is essentially transferring a risk from one party to another in
exchange for a payment made.
• Insurance can be seen as a periodic payment that is made to guard against any losses suffered,
whilst indemnity is a contract between two parties for which the injured party will receive
compensation for any losses.
6. BIBLIOGRAPHY
 Contract law and Specific Relief, EBC, Avtar Singh, 12th Edition
 Law of Contracts II, R K Bangia
 www.lawyersclubindia.com
 www.legalservicesindia.com
 Legal Studies Research Paper No. 11/41 The Nature of Contractual Indemnities ,Wayne
Courtney
 www.thecsclubindia.com
 www.freelegaldictionart.com
 www.academike.com

Contracts II Final Project

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CHANAKYA NATIONAL LAW UNIVERSITY

The Final draft for the fulfilment of project of Law of Contracts II

Submitted to:-Mr. Vimal Kumar

An insurance contract is a document representing the agreement between an insurance

(a) Definition and Nature

Indemnity can be treated as a sub-species of compensation and a Contract of Indemnity is a

ADAMSON vs. JARVIS 4

A contract of Indemnity may arise by:

(b) Rights of Indemnity Holder

The indemnity holder is entitled to recover the:

(c) Rights of Indemnifier

(d) Contract of Indemnity, when enforceable

(a) Meaning and Nature

1. Offer & Acceptance:

There are three types of conditions as follows:

4. Consensus “ad idem” (Same mind):

Varying Scopes of Protection

Parties are increasingly looking to subcontractor default insurance (SDI or Subguard)[2] to

Regulatory scrutiny on insurance companies is focused heavily on solvency, and insurers as a

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