PRINCIPLE OF INDEMNITY: A CRTITICAL ANAYALISYS

Special Assignment Report on

PRINCIPLE OF INDEMNITY: A CRTITICAL

ANAYALISYS

Special Assignment Submitted to:

Dr. Y. Papa Rao
(Faculty, Insurance Law-II)

Special Assignment Project Submitted By:

Devvrat Vaishnav, Roll No. 58, Section- A

SEMESTER- X

HIDAYATULLAH NATIONAL LAW UNIVERSITY

Uparwara Post, Atal Nagar, Nava Raipur – 492002 (C.G.)

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 PRINCIPLE OF INDEMNITY: A CRTITICAL ANAYALISYS

ACKNOWLEDGEMENTS

Thanks to the Almighty who gave me the strength to complete this project with sheer hard

work and honesty. This research venture has been made possible due to the generous co-operation

of various persons. To list them all is not practicable, even to repay them in words is beyond the

domain of my lexicon.

This project wouldn’t have been possible without the help of my teacher Dr. Y. Papa Rao,

Faculty, Insurance Law-II at HNLU, who had always been there at my side whenever I needed

some help regarding any information. He has been my mentor in the truest sense of the term. The

administration has also been kind enough to let me use their facilities for research work.

HNLU, Raipur

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 PRINCIPLE OF INDEMNITY: A CRTITICAL ANAYALISYS

DECLARATION

I, Devvrat Vaishnav hereby declare that, the project work entitled Principle of indemnity : A
critical analysis submitted to Hidayatullah National Law University, Raipur is record of an
original work done by me under the able guidance of Dr. Y. Papa Rao, Faculty Member,
H.N.L.U., Raipur.

DEVVRAT VAISHNAV

Batch - XV

SEM –X

ROLLNO-58

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 PRINCIPLE OF INDEMNITY: A CRTITICAL ANAYALISYS

CONTENTS
ACKNOWLEDGEMENTS ............................................................................................................ II

DECLARATION .......................................................................................................................... III

CHAPTER-1: INTRODUCTION ................................................................................................... 1

STATEMENT OF THE PROBLEM ................................................................................... 1

AIMS AND OBJECTIVES ................................................................................................. 2

RESEARCH METHODOLOGY......................................................................................... 2

SCOPE OF THE STUDY .................................................................................................... 2

REVIEW OF LITERATURE .............................................................................................. 2

RESEARCH QUESTIONS ................................................................................................. 3

CHAPTER-2: INDEMNITY- THE CONCEPT ............................................................................. 4

CHAPTER – 3: INDEMNITY AND INSURANCE LAW ............................................................ 5

 RELATION BETWEEN INDEMNITY AND INSURANCE........................................ 6

 POSITION IN INDIA- .................................................................................................... 6

 POSITION IN ENGLAND- ............................................................................................ 6

CHAPTER-4: DOCTRINE OF SUBROGATION ......................................................................... 8

CONCLUSION ............................................................................................................................. 11

SUGGESTION ............................................................................................................................. 11

BIBLIOGRAPHY/REFERENCES............................................................................................... 12

 BOOKS, ARTICLES AND JOURNALS ..................................................................... 12

 WEBSITES ................................................................................................................... 12

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 PRINCIPLE OF INDEMNITY: A CRTITICAL ANAYALISYS

CHAPTER-1: INTRODUCTION
The Concise Oxford Dictionary defines insurance as “the action of insuring someone or
something” or “a thing providing protection against a possible eventuality”. The need for
practice of insurance can be traced back to the ancient period. It finds mention in the writings of
Manu (Manusmrithi ), Yagnavalkya (Dharmasastra ) and Kautilya ( Arthasastra ). The
writings talk in terms of pooling of resources that could be re-distributed in times of calamities
such as fire, floods, epidemics and famine.1 the same is reflected by the Hindu philosophy which
lays the nature of insurance upon the Sanskrit verse which says: “Yat bhavathi tat nasyathi”
meaning “whatever is created will be destroyed”.1
Insurance is a contract by which the one party in consideration of a price called the premium paid
to him adequate to the risk becomes security to the other that he shall not suffer loss, damage or
prejudice by the happening of the perils specified to certain things which may be exposed to them.3
More or less, the definition above implies insurance as nothing but a form of contract. The contract
of insurance, as it is for any other general contract, has some essentials to be met in order to sum
it up as ‘contract’ of insurance. The general principles which every contract of insurance must
adhere to consist of good faith (uberrimea fidei), risk covered, an indemnity clause and should
have an insurable interest over the subject matter.

 STATEMENT OF THE PROBLEM

The principle of indemnity as defined in Contract Act of 1872 provides for indemnification of loss
caused to the party due to the act of promissory himself or by the act of third party. Under the
insurance law the principle of indemnity features in almost all insurance policies except the policy
for life insurance. In this research paper an attempt has been made to understand the concept of
indemnity and how it functions in the area of insurance. Is there any difference in approach towards
indemnity from that of Contract Act? To what extent does a person can claim protection of
indemnity under the insurance law?

1
KSN Murthy & Dr. KVS Sarma, Modern Law of Insurance, LexisNexis Butterworths Wadhwa, Nagpur (4th Ed.
2009).

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 PRINCIPLE OF INDEMNITY: A CRTITICAL ANAYALISYS

 AIMS AND OBJECTIVES

1. To understand the concept of indemnity and its relevance in the insurance law.

2. To study the extent to which the principle of indemnity is applicable to insurance claim.

 RESEARCH METHODOLOGY
This project is a Doctrinal research includes studying books and established literature and not
actually going to the field and doing empirical research. Source of research work: The sources of
this project are both primary (bare acts, statutes, etc) and secondary sources (books given by
different authors, journals, internet, etc). This Research Project is descriptive and analytical in
nature.

 SCOPE OF THE STUDY

The current projects scope is confined to the study of Principle of indemnity specifically focuses
on this aspect of recent cases in 2020 in the country.

 REVIEW OF LITERATURE

1. Peel, Edwin; Tritely, Günter H. (2010). The law of contract (12th Ed.). London: Sweet
& Maxwell. ISBN 9780421948402.- Indemnify. To "indemnify" is to protect against or
reimburse for damage, injury or loss. Typically, an association's governing documents
will indemnify officers and directors against expenses, judgments, fines, settlements and
attorneys' fees reasonably incurred in connection with any threatened or actual civil or
criminal proceedings. In civil proceedings, officers and directors may be indemnified if
they acted in good faith and in a manner reasonably believed to be in the best interests of
the association. In the case of criminal proceedings, they may be indemnified if they had
no reasonable cause to believe their conduct was unlawful
2. Sweigart, Raymond. "English Indemnity Law–Parsing the Promise: Words Are
Important, But So Are Actions- the Rust case suggests that English law indemnities must
always be drafted with great care and an eye to what the parties really intend and the various
circumstances that might later arise. In particular, unless the indemnity explicitly states that
it covers all claims, whether proven or merely alleged, it may well be that a court will later
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 PRINCIPLE OF INDEMNITY: A CRTITICAL ANAYALISYS

restrict the indemnity to actual, proven liabilities. Indemnifying parties likewise need to be
aware of the potential consequences of receiving notice and the opportunity to take over
claims against the indemnified party. Seeking professional legal advice at all stages of the
process can be crucial in securing the perceived benefits of the bargain, as well as avoiding
missteps and unintended consequences.
3. Hold Harmless & Indemnify". Adams-Stirling Professional Law Corp. Retrieved
22 April 2016. It is important that reference is made to there being ‘consideration’ for
the issue of the indemnity and, where there is a concern about the adequacy of the
consideration, the agreement should be signed as a deed. Appropriate gross-up
provisions should also be applied to ensure that, if any money paid is treated as taxable
income, the seller should be obliged to gross up the damages to cover any such
liability.

 RESEARCH QUESTIONS
1. What is the concept of indemnity and its relevance in the insurance law?
2. What the extent to which the principle of indemnity is applicable to insurance claim?

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CHAPTER-2: INDEMNITY- THE CONCEPT

The word indemnity means “a promise to pay for the cost of possible damage, loss, or injury2 or
the security, protection and compensation given against damage, loss or injury. Indemnity has been
defined under § 1243 of The Indian Contract Act, 1872. It provides-
Section 124- 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.”
Indemnity in English law means a promise to save a person harmless from the consequence of an
act. The promise may be express or it may be implied from the circumstances of the case.4 The
general law of indemnity is much wider5 According to English Common Law, ‘indemnity means
a promise to save a person harmless from the consequences of an act6the promise in this case
may be express or implied. The English definition is very wide. It also includes promises to save
the promisee from harm or loss caused by events or accidents which are not, or may not depend
on the conduct of any person7 and where loss may be caused to a person on acting under the
instructions of a person who authorized to issue instructions.8
The definition of indemnity given in §.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. It has been held in Gajanan Moreshwar Parelkar
v. Moreshar Madan Mantri 9 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.

2
www.merriam-webster.com/dictionary/indemnity
3
Section 124 of the indian contract act, 1872
4
Adamson v. jarvis (1827) 4 bing 66
5
Tropical insurance co v. zenith life insurance co, air 1941 lah 68
6
Avtar singh, law of contract, (6th ed., 2019), p. 425
7
Mulla, indian contract and specific relief acts, (12th ed., 2019), p. 1716
8
S.N.Gupta, the banking law in theory and practice, (3 rd ed., 2018), p. 1127
9
Air 1942 bom 302.

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CHAPTER – 3: INDEMNITY AND INSURANCE LAW

The insurance sector has been growing steadily and is a major source of long term contractual
funds needed for infrastructure development. In the case of Richard v. Forest Land, Timber and
Railways Co. Ltd 10 the court while recognizing the relation of indemnity with regard to the
contract of marine insurance stated that “…the object both of the legislature and of the courts has
been to give effect to the idea of indemnity, which is the basic principle of insurance, and to apply
it to the diverse complications of fact and law in respect of which it has to operate”.

In case of Fireman's Fund Ins. Co. v. Holland Am. Line-Westours, Inc11 the court explained the
indemnity under the insurance law. It said that Indemnity principle is a rule of insurance law which
says an insurance policy should not confer a benefit greater in value than the loss suffered by the
insured. It is a basic principle of insurance law, absent bad faith on the part of the insurer; an
insured is entitled to compensation only for losses actually suffered. Under the indemnity principle
of insurance, an insured receives only that amount that will indemnify actual loss, not an additional
windfall above this amount.

Insurance law is a subject of key import to individuals & the business sector. The aspiration of
insurance is to compensate the aggrieved party, as far as money can, against loss arising from a
variety of risks. Thus, when a person enters into an insurance contract he purchases for an agreed
Premium, financial coverage from loss sustained due to the peril insured against. Insurance is
omnipresent in the practice of law. In litigation, insurance often determines who gets sued and
what they get sued for.

In transactional law, insurance frequently constrains or induces deals. The importance of insurance
stems from the fact that insurance is the primary means by which companies and individuals deal
with risks. The operational framework of insurance idea is provided by the general principles of
contract. The insurance policy, being a contract, is subject to all the judicial interpretative

10
All ER 62 HL
11
Fed. Appx. 602 (9th Cir. Wash. 2002)

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technique of rules of interpretation as propounded by the judiciary, besides; the insurance idea has
a compensatory justice component.
Most kinds of insurance policies other than life and personal accident insurance are contracts of
indemnity whereby the insurer undertakes to indemnify the insured for the actual loss suffered by
him as a result of the occurring of the event insured against. Even within the maximum limit, the12
the17 insured cannot recover more than what he establishes to be his actual loss. A contract of
marine insurance is an agreement whereby the insurer undertakes to indemnify the insured to the
extent agreed upon.

RELATION BETWEEN INDEMNITY AND INSURANCE

Position in India-

It has been noted above that section-124 recognizes only such contract as a contract of indemnity
where there is a promise to save another person from loss which may be caused by the conduct of
the promisor himself or by conduct of any other person. It does not cover a promise to compensate
for loss not arising due to human agency. Therefore, a contract of insurance is not covered by the
definition of section-124. Thus, if under a contract of insurance, an insurer promises to pay
compensation in the event of loss by fire, such a contract does not come within the purview of
section-124. Such contracts are valid contracts, as being contingent contracts as defined in section-
31.
In United India Insurance Co. vs. M/s. Aman Singh Munshilal 13 the cover note stipulated
delivery to the consigner. Moreover, on its way to the destination the goods were to be stored in a
godown and thereafter to be carried to the destination. While the goods were in the godown, the
goods were destroyed by fire. It was held that the goods were destroyed during transit, and the
insurer was liable as per the insurance contract.

Position in England-

Under English law, the word “indemnity” carries a much wider meaning than given to it under the
Indian Contract Act. It includes a contract to save the promise from a loss, whether it is caused by
human agency or any other event like an accident and fire. Under English law, a contract of

12
Vania Silk Mills (P) Ltd. v. CIT (1991) 4 SCC 22.
13
AIR 1994 P H 206

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insurance (other than life insurance) is a contract of indemnity. Life Insurance contract is, however,
not a contract of indemnity, because in such a contract different considerations apply. A contract
of life insurance, for instance, may provide the payment of a certain sum of money either on the
death of a person, or on the expiry of a stipulated period of time (even if the assured is still alive).
In such a case, the question of amount of loss suffered by the assured, or indemnity for the same
does not arise. Moreover, even if a certain sum is payable in the event of death, since, unlike
property, the life of a person cannot be valued, the whole of the amount assured becomes payable.
For that reason also, it is not a contract of indemnity.

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CHAPTER-4: DOCTRINE OF SUBROGATION

Subrogation is the right or rights of the insurer to assume the rights of the insured legal rights or
to step into the shoes of insured.19 Rights of subrogation can arise two different ways:
automatically as a matter of law, or by agreement as part of a contract.14 Rights of subrogation can
arise two different ways: automatically as a matter of law, or by agreement as part of a contract 15
Subrogation by contract commonly arises in contracts of insurance. Subrogation as a matter of law
is an equitable doctrine, and forms part of a wider body of law known as unjust enrichment. Two
areas where subrogation is relevant are insurance and sureties. In each case, the basic premise is
that where one person (i.e. typically an insurer or a guarantor) makes a payment on an obligation
which is the primary responsibility of another party, the person making the payment is subrogated
to the claims of the person to whom they made the payment with respect to any claims or remedies
which are exercisable against the primarily responsible party.
In the case of all policies of insurance which are contract of indemnity, the insurer, on payment
of the loss, by virtue of the doctrine of subrogation are entitled to be placed in the position of the
assured, and the succeed to all his rights and remedies against third parties in respect of the
subject matter of insurance. In John Edward & co v. Motor Union Insurance Co ltd16 the history
of doctrine of subrogation was outlined by Mccardie who observed that principle of equity.
The doctrine of subrogation has been adopted solely for the purpose of preventing the assured
from recovering more than a full indemnity placing the insurer in the position of the insured.17
The right of subrogation does not arise unless and until the insurer have admitted the assured
claim18 and have paid the sum payable under the policy.
Subrogation is the right of insurers, once they have paid the insurance money due, to exercise any
rights or remedies of the insured arising out of the insured event to recover their outlay from a
culpable third party. That right is almost invariably enshrined expressly in the wording of the
insurance policy but, even if not written in to the policy, applies in any event. There are two key
underlying principles to bear in mind when dealing with subrogation. The first is that subrogation

14
What is Subrogation available at thelawdictionary.org/subrogation/
15
legal-dictionary.thefreedictionary.com/subrogation
16
1922] 2 KB 249
17
Castellan v Preston [1883] 11 QBD 380
18
Midland insurance v. Smith 1881 6 QBD 561 per Watkins William J at 564

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is a doctrine founded on the indemnity principle, namely that an insured has a right to be
indemnified against his loss but cannot make a profit from it by getting paid his insurance money
as well as obtaining compensation from a third party. By way of example therefore and as
illustrated by one of the leading subrogation cases Castellan v Preston19, if an insured vendor of
a property suffers fire damage between exchange and completion and is indemnified by his
insurers, the insured must then account back to insurers when the sale of the house is completed
and he receives the full purchase price to which he was entitled in spite of the fire.

Insurers cannot pursue a claim in the name of their insured until the insured has been fully
indemnified, unless agreed otherwise. The majority of policies will include an express condition
permitting insurers to commence a subrogated claim in the insured's name even if negotiations
over the extent of the entitlement to an indemnity have not been concluded. If not, such terms may
need to be specifically agreed if urgent action needs to be taken in pursuing the recovery. Insurers
must, of course, agree to indemnify the insured in respect of costs associated with bringing a
subrogated claim. It is also likely that the policy will include an express term giving insurers the
right to control any legal proceedings brought against a third party. In the absence of a specific
term or agreement to that effect, if the insured has suffered a loss over and above the amount for
which they have been indemnified, the insured is entitled to control the proceedings and can settle
the claim without reference to the insurer. However, the insured must still act in good faith, which
means including both insured and uninsured losses and not compromising any claim insurers may
have when negotiating a settlement. Should the insurer's claim be prejudiced, the insurer would be
able to seek reimbursement from the insured.20
Contribution is the right of an insurer to call upon others similarly, but not necessarily equally
liable to the same insured to share the cost of an indemnity payment. This principle of contribution
enables the total claim to be shared in a fair way. The doctrine of contribution operates as a
corollary of the doctrine of Indemnity and hence is applicable in case of general insurance. As per
the doctrine of contribution the indemnity provided for the loss occurring on the asset, which is
insured with several insurers has to be proportionately shared among them according to the ratable
proportion of the loss. The amount of total compensation or indemnity provided to the insured by all

19
[1883] 11 QBD 380
20
Subrogation, Principle and Practice

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the insurers should not exceed the amount of loss. Sometimes when the value of the asset is very high
the amount of risk involved is higher and that particular asset if insured by the company forms a
significant portion of the total risk.

Insurance policy aims to protect business owners and employees when they are found to be at fault
for a specific event such as misjudgment. Indemnity is a fundamental principle of insurance law,
and the principle of Subrogation is a corollary of this principle in as much the insured is precluded
from obtaining more than the loss he has sustained. The most common form of subrogation is
when an insurance company pays a claim caused by the negligence of another.
The doctrine of subrogation confers two specific rights on the insurer. Firstly, the insurer is entitled
to all the remedies which the insured has against the third party incidental to the subject matter of
the loss, such that the insurer can take advantage of any means available to extinguish or diminish,
the loss for which the insurer has indemnified the insured. Secondly, the insurer is entitled to the
benefits received by the assured from the third party with a21 view to compensate himself for the
loss. The fact that an insurer is subrogated to the rights and remedies of the insured does not ipso
jure22 enable him to sue third parties in his own name. It will only entitle the insurer to sue in the
name of23 insured, it being an obligation of the insured to lend his name and assistance to such an
action. An insurance policy may contain a special clause whereby the insured assigns all his rights,
against third parties, in favor of the insurer. In case of subrogation which vests by operation of law
rather than as the product of express agreement, the insured would be entitled to only to the extent
of his loss.

21
Union of India v Sri Sarada Mills Ltd., 1972 (2) SCC 877
22
Oberai Forwarding Agency v New India Assurance Co. Ltd. & Anr. 2002 (2) SCC 407.
23
Union of India v Sri Sarada Mills Ltd., 1972 (2) SCC 877

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CONCLUSION
As it is known and specifically provided, one cannot claim compensation for a breach of contract
when the loss suffered is indirect and/or remote. However, there remains no such exception for a
contract of indemnity. Much is left to the contractual freedom and will of the parties. A typical
indemnity clause thus provides for protection against all kinds of losses, claims and liabilities,
howsoever arising in relation to the specified transaction.
Thus, the Indian law position seems to be no different from the common law one in this regard,
though much depends on the nature and wordings of the contract in question and the Court's
inference of the intention of the contracting parties to include consequential losses. Thus it can be
concluded that as a general rule, the law usually leans unfavorably towards those who try to avoid
liability or seek exemption from liability of their actions, irrespective of where the cause of action
arises

SUGGESTION
Indemnity and insurance clauses are seldom given any consideration when business agreements
are drafted. They are typically boiler-plate clauses contained within precedents. Risk managers
must be aware of the different types of indemnity and insurance clauses, and how they interact.
Being attentive to such issues can avoid much unnecessary, and expensive, litigation.

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BIBLIOGRAPHY/REFERENCES

BOOKS, ARTICLES AND JOURNALS

1. Avatar Singh : Law of Insurance , Eastern Book Company, Lucknow

2. Avtar Singh, Law of Contract, (6th ed., 1996), p. 425

3. KSN Murthy & Dr. KVS Sarma, Modern Law of Insurance, LexisNexis Butterworths
Wadhwa, Nagpur (4th Ed. 2009).
4. M.N. Srinivasan, Principles of Insurance Law (1997), Ramaiya Publishers, Banglore

5. Mulla, Indian Contract and Specific Relief Acts, (12th ed., 2001), p. 1716
6. S.N.Gupta, The Banking Law in Theory and Practice, (3rd ed., 1999), p. 1127

WEBSITES
1. www.legalindia.com
2. www.jsotr.com
3. www.manupatra.com
4. www.ssrn.com

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