Indemnity

What is Indemnity?

Indemnity is protection, security, or coverage against potential loss or damage. It is a legal mechanism designed to compensate individuals or organisations for losses or damages incurred. Indemnity is critical in managing risks in various sectors, including business, insurance, and contractual agreements.

Contract of Indemnity

Under Section 124 of the Indian Contract Act of 1872, a contract of indemnity is defined as:

"A contract by which one party promises to compensate the other party for losses caused by the conduct of the promisor or any other person."

• Objective: To shield the promisee from unexpected losses.
• Nature: A contingent contract, as its operation depends on the occurrence of a specified event.
• Exclusions: Losses caused by natural calamities (acts of God), accidents, or the conduct of the promisee are typically not covered.

Parties Involved in a Contract of Indemnity

1. Indemnifier (Promisor): The party who promises to compensate for the loss.
2. Indemnity Holder (Promisee): The party is protected from the loss.

Example: If Akhil promises to indemnify Prathibha for any loss to her goods, Akhil is the indemnifier, and Prathibha is the indemnity holder.

Essentials of a Contract of Indemnity

1. Offer and Acceptance: Mutual agreement must be involved.
2. Legal Purpose: The contract should be entered into for lawful reasons.
3. Objective of Protection: Designed to shield the indemnity holder from losses.
4. Express or Implied Contract: This can be written, verbal, or implied by conduct.
5. Capacity to Contract: Both parties must be legally capable of entering into the contract.
6. Liability Activation: The indemnifier's liability arises only after the indemnity holder has suffered a loss.
7. Independent Obligation: The indemnifier's liability is primary and independent of other obligations.

Indemnity in Insurance Contracts

• Most insurance agreements (except personal insurance policies) are considered contracts of indemnity.
• Insurer’s Obligation: To restore the insured to their position before the loss occurred.
• Profit Prohibition: The insured cannot profit or incur additional losses from the operation of the insurance policy.

Advantages of Indemnity

1. Risk Management: Protects individuals or organisations from unforeseen financial burdens.
2. Financial Stability: Ensures smooth recovery from losses or damages.
3. Legal Protection: Covers legal liabilities arising from certain acts.
4. Encourages Business Growth: Promotes confidence in partnerships and transactions by mitigating potential losses.