Contract of Indemnity and Insurance
Contract of Indemnity and Insurance
1. Contract of Indemnity
Definition
A Contract of Indemnity is 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. This is defined under Section 124 of the Indian Contract Act, 1872.
The party who promises to indemnify is called the Indemnifier.
The party who is protected from loss is called the Indemnity-holder or Indemnified party.
Essential Features
Promise to compensate for loss: The indemnifier promises to compensate the indemnity-holder against loss or damage.
Loss must be caused by the promisor or by another person.
Loss must be actual: Indemnity relates to losses already incurred or likely to be incurred.
Example
If A promises to indemnify B against any loss caused by C, then A will compensate B for such loss.
Rights of Indemnity-holder
He can recover the amount from indemnifier who has promised the indemnity.
He can recover the amount even if the loss was caused by a third party.
2. Contract of Insurance
Definition
A Contract of Insurance is a contract whereby one party (the insurer) undertakes to indemnify another (the insured) against loss arising from specified contingencies, in return for a consideration called the premium.
The contract is a special kind of contract of indemnity, primarily regulated under the Insurance Act, 1938.
The main purpose is to protect against specific risks.
Characteristics
Insurable Interest: The insured must have an insurable interest in the subject matter of the insurance.
Utmost Good Faith (Uberrimae fidei): Both parties must disclose all material facts.
Consideration: The insured pays a premium.
Risk Transfer: The insurer assumes the risk.
Contingency: Loss must arise from a specified event.
Types of Insurance
Life Insurance
Fire Insurance
Marine Insurance
Motor Vehicle Insurance, etc.
Relationship Between Contract of Indemnity and Insurance
Both involve protection against loss.
Insurance is a contract of indemnity with special features and regulation.
Indemnity contract is more general and can be oral or written.
Insurance contracts require insurable interest and payment of premium.
Insurance is subject to strict statutory control.
Case Laws on Contract of Indemnity and Insurance
Contract of Indemnity
National Insurance Co. Ltd. v. Balakrishna Shetty (1993)
The Supreme Court held that the indemnifier’s liability arises only when the indemnified party suffers a loss.
Mere threat of loss or contingent liability does not create enforceable liability.
Amrit Lal v. Union of India (1957) AIR 520
It was held that the indemnifier is liable to compensate for any damage or loss suffered by the indemnity-holder due to conduct of the indemnifier or third party.
Contract of Insurance
Lalman Shukla v. Gauri Dutt (1913)
Although primarily about agency, it highlighted the principle of utmost good faith applicable in insurance contracts.
The insurer is entitled to all material information before contract formation.
Oriental Insurance Co. Ltd. v. Meena Variyal (1992)
The Supreme Court held that in insurance contracts, the insurer is liable only when the insured proves the loss falls within the terms of the policy.
Insurer’s liability arises only when insured has suffered a loss due to an insured risk.
New India Assurance Co. Ltd. v. M/S. Ramprasad (1994)
The Court elaborated on the principle that insurance contracts are contracts of indemnity, not of guarantee or warranty.
Summary
| Aspect | Contract of Indemnity | Contract of Insurance |
|---|---|---|
| Definition | Promise to save from loss | Contract to indemnify against risk |
| Parties | Indemnifier & Indemnity-holder | Insurer & Insured |
| Nature | General contract | Special contract under statute |
| Consideration | Promise to compensate loss | Premium paid |
| Insurable Interest | Not necessary | Must be present |
| Governing Law | Indian Contract Act, 1872 | Insurance Act, 1938 |
| Risk Transfer | Yes | Yes |
| Utmost Good Faith | Not mandatory | Mandatory |
RELATED Blog
0 comments