Contract of Indemnity and Insurance

According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity means “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 conduct of any other person.” This provision incorporates a contract where one party promises to save the other from loss which may be caused, either

(i) by the conduct of the promisor himself; or

(ii) by the conduct of any other person.

This definition covers indemnity for loss caused by human agency only. It does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier.

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 Company v. M/s. Aman SinghMunshilal A.I.R. 1994 P. & H. 206, 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.

Liability of insurer and breach of fidelity insurance contract

In Oriental Insurance Co. Ltd., Ahmedabad v. Gujarat State Warehousing Corpn. Ahmedabad, A.I.R. 2003 Guj. 159, where insured bags of fertilizer stored in plaintiff’s godown, were found missing due to act of embezzlement by the employees of plaintiff Company. Defendant Company had ensured to indemnify plaintiff against loss sustained by such act. The alleged breach of condition in the contract notice to be given to defendant regarding discovery of such act could not be said to be fundamental breach. Held, that it would not permit the defendant to negate the legitimate claim of the plaintiff, hence decreeing suit for declaration and recovery of amount with interest by Trial Court was proper.

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 promisee 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 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.

The Indian Contract Act does not specifically provide that there can be an implied contract of indemnity. In Secretary of State v. The Bank of India Ltd., A.I.R. 1938 P.C. 191, the Privy Council has, however, recognized an implied contract of indemnity also. The Law Commission of India in its 13th Report, 1958, on the Indian Contract Act, 1872 has recommended the amendment of Section 124. According to its recommendation, “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. It should also provide clearly that the promise may also be implied.”

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