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Contracts of Indemnity & Insurance: Features and Distinctiveness


Authored by Ishaanvi


Keywords: Insurance, Indemnity, English law.


Abstract

The relation between Indemnity and Insurance is of great importance due to the fact that the latter is a social security. Their objective is to indemnify a party for their financial losses and recoup it to its original financial status.[1] Under English law, Indemnity incorporates a different meaning than that under the Indian Contract Act. The English law states that a contract of insurance (excluding life insurance) is a contract of indemnity. Life insurance is not covered under contract of indemnity because the value of money can never compensate for the life of a person.

Introduction

Contract of indemnity

According to section 124 of the Indian Contract Act, a contract of indemnity is a contract in which one party assures protection to the other from loss caused to him either by the conduct of the assurer himself or by the conduct of another person.[2]

For instance, a construction company may sign an indemnity contract with a contractor to indemnify him against a lawsuit if he gets injured due to negligence. Here, the company is an “indemnifier” and the contractor is an “indemnity-holder” or “indemnified”.


Insurance

Insurance is an approach for protection from financial loss. It is a kind of risk management that is particularly used to hedge against the risk of a contingent. An “insurer” is the one who provides insurance policies and “insured” or “policyholder” is the one who is covered under the insurance policy. It can be described as a social device that reduces or eliminates a risk of loss to life and property.

The policyholder receives a contract- the insurance policy, which describes the terms and conditions and circumstances under which the insurer will compensate the policyholder.[3] The amount that is paid to the policyholder by the insurer is known as Premium and is determined by the Insurance rate.


Historic development in the contract of indemnity

Indemnity was cramped only to the loss occurred by the human agency only.

In Gajanan Moreshwar v. Moreshwar Madan, it was stated that indemnity only covers loss caused by humans only and isn’t concerned with cases where loss is caused by events or accidents that may or may not depend on the conduct of the indemnifier or any other person.

The terms and conditions of indemnity should be mentioned in the contract.

In SBI v. Mula Sahakari Sakhar Karkhana Ltd. the respondent, a sugar factory owner, entered into a contract with the defendant. According to the government, the defendant issued a bank indemnity. The Supreme Court stated that the claim made by the assured on termination of the contract need not be fulfilled by the bank without any proof of loss.

The relation between Insurance and Indemnity:-


In India

A contract of insurance is not covered under section 124 of the Indian contract act.[4] This is due to the fact that indemnity is a contract where there is a promise to save another person from loss which may be caused by the conduct of the promisor or by the conduct of some other person. It does not include a promise to compensate for loss not arising due to human agency. Therefore, if under a contract of insurance, an insurer promises to pay compensation in the event of loss by fire, such a contract doesn’t come within the purview of section-124. Such contracts are valid contracts, as being contingent contracts as defined in section-31.[5]

In the case, United India Insurance Co. vs. M/s. Aman Singh Munshilal, the cover note specified delivery to the consigner. Furthermore, on its way to the destination, the goods were to be stored in a godown and subsequently to be carried to the destination. Even though the goods were in the godown, the goods were destroyed by fire. It was held that the goods were destroyed during transfer, and the insurer was liable as per the insurance contract.


In England

Under English law, the word “indemnity” carries a different meaning than that under the ICA. According to this law, a contract of insurance (excluding life insurance) is a contract of indemnity. However, Life insurance is not covered under the contract of indemnity because the value of money can never compensate for the life of a person.[6]

Conclusion

The Indian Contract Act does not particularly provide that there can be an implied contract of indemnity. The Privy Council has, anyhow, recognized an implied contract of indemnity also (Secretary of State v. the Bank of India Ltd). The Law Commission of India in its Report (13th Report, 1958, on the Indian Contract Act, 1872) has suggested the amendment of section 124. It suggests that the definition of the ‘Contract of Indemnity’ in section 124 be expanded to include cases of loss caused by events which may or may not depend upon the conduct of any person and should also provide that the promise may also be implied of the law of contract to be applied by the Courts in India or even any particular sub-division thereof.

To conclude, analytically it is also true that indemnity has been embedded in the concept of insurance and as well as the concept of guarantee. Guarantee and insurance are the species of the same genus .i.e., indemnity or in other words the contract of insurance and the contract of Guarantee are the development on the contract of indemnity.

References

· https://www.grosvenor.com.au/resources/indemnities-versus-insurances-do-you-understand-the-difference/

· https://www.mycoitracking.com/insurance-vs-indemnification/

· https://en.wikipedia.org/wiki/Indemnity


Foot Notes:- [1] https://www.mycoitracking.com/insurance-vs-indemnification/ [2] https://www.grosvenor.com.au/resources/indemnities-versus-insurances-do-you-understand-the-difference/ [3] https://www.mycoitracking.com/insurance-vs-indemnification/

[4] https://en.wikipedia.org/wiki/Indemnity [5] https://www.grosvenor.com.au/resources/indemnities-versus-insurances-do-you-understand-the-difference/ [6] https://en.wikipedia.org/wiki/Indemnity

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