The contract of indemnity is a contract by which one party promises to save other from loss likely to be caused to him. The loss can occur due to conduct of promisor or any other person. The assured person must prove the loss.
For example, Rishabh Pant enters into contract with ICICI Lombard Insurance company to indemnify for various kinds of loss arising from operation of his Mercedes-Benz car, such as damage to the car itself, or medical expenses following an accident. On December 30, 2022, Rishabh met with an accident while driving from Delhi to Roorkee. The ICICI Lombard Insurance company has to pay the repair expenses of car as well as medical expenses incurred by Rishabh Pant on his medication irrespective of the fact whether accident occurred due to Rishabh’s fault or car’s manufacturing fault or someone else’s fault. Therefore, Car insurance is a contract of indemnity. Even all insurance contracts are contract of indemnity except life insurance.
You can remember Indemnity like ‘kare koi bhare koi’.
There are two parties in indemnity contract.
- Indemnified: The person whose loss occurred is indemnified. The person indemnified is also called Indemnity Holder. For instance, in our above example Rishabh Pant is Indemnity Holder.
- Indemnifier: The person who promises to indemnify or make good the loss is called Indemnifier. For instance, in our above example ICICI Lombard Insurance company is Indemnity Holder.
The Section 124 of Indian Contract Act, 1872 deals with contract of indemnity.
Types of Contract of Indemnity
The contract of indemnity may be expressed or implied. Let’s understand it with the help of an example.
Rahul avails car service from authorized Maruti service center M/s Care Taker. He signs service agreement with M/s Care Taker. The service is assigned to service executive namely Abhishek. After performing the service, Abhishek went on to take test drive to check performance of car. But as he leaves the premises of service center, he met with an accident with truck. The Rahul’s car suffers heavy damages. Rahul can now sue either M/s Care Taker or service executive Abhishek.
- If Rahul decides to sue M/s Care Taker, then M/s Care Taker has to pay for the damages as agreement was signed with M/s Care Taker. So, this is the case of expressed indemnity as terms and condition were clear between the parties.
- If Rahul decides to sue service executive Abhishek, then also M/s Care Taker has to pay for the damages as Abhishek was working on behalf of M/s Care Taker. Thus, any deficiency in service is implied to be done by M/s Care Taker as Abhishek was working for the benefit of his employer. So, this is the case of implied indemnity as terms and condition were not clear between the parties, but was implied on their act or behaviour.
Expressed Indemnity
When a person expressly promises to compensate the other from loss, it is said to be expressed indemnity. The terms and conditions of indemnity are conveyed either written or verbally specifically in contract. The terms and conditions of contract are clear between the parties.
Implied Indemnity
In implied indemnity, the terms and condition are not expressed explicitly by parties concerned, but by their act or behaviour.
Rights of Indemnity Holder
The Section 125 of Indian Contract Act, 1872 delas with the liability of indemnifier or Rights of indemnity holder.
- Right to recover damages: The indemnity holder has the right to recover all the damages which he is compelled to pay in any suit in respect of any matter covered by the contract of indemnity. The indemnifier has to pay damages which indemnity folder will claim in suit.
- Right to recover costs: The indemnity holder has the right to recover all the costs which he is compelled to pay in bringing or defending such suit.
- Right to recover sums paid: The indemnity holder has the right to recover all the sums which he has paid under the terms of a compromise of such suit.
- Right to sue for specific performance: The indemnity holder is entitled to sue for specific performance if he has incurred absolute liability and the contract covers such liability.
Enforcement of Contract of Indemnity
It commences as soon as loss of indemnified becomes absolute, certain or imminent.
Specified time of Notice
To be entitled to claim, the indemnity holder has to give notice to indemnifier in order to be entitled for claim. The notice should be given immediately. Immediately means as quickly as reasonably possible.
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