Indemnity

Under the insurance contract the insurer undertakes to "indemnify" the insured against loss
suffered by the latter. Indemnity literally means "security against damage or loss" or
"compensation for loss" or "make good the loss". It means a promise to save another person
from harm or from the loss caused as a result of a transaction entered into at the instance of the
promisor.
Prof Hansell' defines it as "an exact financial compensation".
The Indian Contract Act defines indemnity as '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
another person (section 124 of Indian contract act)
Section 125 - In a contract of indemnity, the indemnity holder is the beneficiary party and
hence, the majority of the rights are in his favour. These rights are provided to him by Section
125 of the Indian Contract Act, 1872. Section 125 of the Indian Contract Act, 1872, confers
some rights to the indemnity holder and are to be fulfilled by the indemnifier and these rights
include-

o Right to recover damages (Section 125(1))

o Right to recover the costs incurred (Section 125(2))
o Right to recover sums paid during compromise (Section 125(3))

According to this principle, the assured in the case of loss against which the policy has been
made shall be indemnified for only the actual loss suffered by him but will never be more than
fully indemnified. In other words, indemnity restores the indemnity holder to the same financial
position after a loss as he enjoyed immediately prior to the loss. This is in conformity with the
basic concept of insurance, whereby an insurer is required to compensate the unfortunate few
for the loss they sustain but does not allow them to earn profit from misfortune. Under the
principle of indemnity, therefore, no profit can be made out of the insurance contract.
Castellain v. Preston, illustrates the operation of this principle:
A house was insured against fire. The insured then contracted to sell the house for a fixed sum,
the contract containing no reference to insurance. After the date of the contract, but before the
date fixed for completion, the house was damaged by fire and the insured received £330 from
the insurer as indemnity against the loss. The sale was afterwards completed, the vendor
receiving the full agreed price without any abatement for the damage caused. On learning this,
insurer brought an action to recover back the £330 as the insured had suffered no real loss. The
court allowed the insurance company to recover and ordered the refund of the amount received
by the insurer.
This principle of indemnity is associated in contract law with the principle of guarantee where
there are three parties, the creditor, the principal debtor and the surety or the favoured debtor.
Insurance law does not have the element of guarantee. This is clear from the fact that there are
only two parties to the insurance contract. On the other hand, indemnity is coupled with the
principle of subrogation or substitution of the rights of the assured by those of the insurer.
Further, indemnity is based upon the occurrence of the contingency which itself is really the
risk insured against. In short, the risk is the contingency. Thus, a contract of insurance is, like
a contract of indemnity, a contract of contingency. It therefore follows that any variation of the
risk must be on mutual consent and if it is not so, the contract becomes voidable at the hands
of the rightful party.

Though a contract of insurance is said to be a contract of indemnity, this is not completely true
for the following reasons:
a. The principle that the assured should not recover more than the loss suffered by him,
may be modified by the express terms of the policy. The insured, a co-sharer of a
building, insured the whole building by paying the premium for the whole building.
When the building was damaged completely, the insured’s claim for loss for the
whole building was repudiated by the insurer. It was held that, having accepted the
premium for the whole building, the insurer was liable to pay the loss for the whole
building.57
b. The parties may estimate the loss and value the policy. If there is no gross over
valuation, the contract is enforceable though the amount recovered is slightly more
than the actual loss suffered by him. Valued policies are common in the case of
insurances on ships and profits.
c. Again, in every contract of insurance there will be a “sum insured” and though the
contract of insurance is described as a contract of indemnity, on the happening of the
event the insured can recover no more than the sum insured though it does not
completely indemnify the assured. It is only upon the proof of the actual loss, that the
assured can claim reimbursement of loss to the extent it is established, not exceeding
the amount stipulated in the contract of insurance which signifies the outer limit of the
insurance company’s liability.58

Marine and Fire Insurance are strictly ‘contract of indemnity’ due to the following principles
o No Profit for Insured: The insurer ensures that the insured cannot make a profit from
the insurance policy. This prevents unjust gains, as claims are only settled to
compensate for genuine losses, avoiding rejection of valid claims that could lead to an
unfair profit for the insurer.
o Compensation for Actual Loss: The primary purpose of these policies is to cover the
"actual loss or damage" sustained by the insured. The insurer will only pay an amount
equivalent to the loss, ensuring the insured is neither better nor worse off than before
the loss.
o Principle of Subrogation: In both fire and marine insurance, once the insurer has
compensated the insured for a loss, they have the right to "step into the shoes" of the
insured and recover the amount from any third party responsible for the damage. This
ensures the insured does not receive double compensation for the same loss.
o Principle of Contribution: If the insured has more than one insurance policy covering
the same risk, the principle of contribution applies. This means that each insurer will
only pay a proportion of the loss, preventing the insured from claiming the full amount
from multiple insurers.
 o Reinstatement in Fire Insurance: In fire insurance, the insurer has the option to either
pay for the loss or reinstate (repair or rebuild) the damaged property. This reinforces
the concept of indemnity, as the insured is returned to the same position they were in
before the loss.
o Substitution/Compensation/Reinstatement: All these methods ensure that the insured is
compensated for their loss but not beyond that, making fire and marine insurance a
strict "contract of indemnity."

Life insurance v. Contract of indemnity

The principle of indemnity states that the insurance company replaces the damages so that they
are in the same state just prior to the occurrence of the loss. In case of life insurance policies it
is not possible for the life insurance companies to repair or replace the insured after his/her
death i.e. the insurance company cannot bring back the insured customer to life after his/her
death. It is not possible to calculate the life value of a person and settle only that amount after
his/her death; hence the life insurance policies are not contracts of indemnity.
• Indemnity means an assurance to make good the losses or compensate or put the
indemnity holder in the same financial position as before the happening of an uncertain
event, whereas if we talk of life insurance the event which is insured is not an uncertain
one as death of a person cannot be called as ambiguous
• In the indemnity the loss that is caused due to an uncertain event can easily be
ascertained in terms of money, but when referred to the death of a person it cannot be
measured in terms of money as nothing can be valued in proportion to the life of a
human.
• In the case of indemnity insurance only the real loss can be indemnified. If the same
subject matter is insured with more than one insurer, the insured is entitled to the real
loss in proportion to the insured sum on different policies obtained from different
insurance companies. While in Life Insurance the assured can claim the sum insured
with different policies on maturity or to his nominee after his death. This feature is
called as ‘double insurance’

Godsall v. Boldero (1807):

In this case, the court initially held that life insurance was a contract of indemnity, meaning
the insurer would only pay if the policyholder suffered a financial loss. However, this
decision was later overruled by Dalby v. India & London Life Assurance Co., which
clarified that life insurance is not a contract of indemnity.

Dalby v. India & London Life Assurance Co. (1854):

This decision established that life insurance is not a contract of indemnity, meaning the
insurer is obligated to pay the agreed sum upon the insured’s death, regardless of the actual
financial loss suffered by the policyholder.
 This case overruled the earlier decision in Godsall v. Boldero, which had treated life
insurance similarly to marine and fire insurance, where the insured must prove a financial
loss to claim the insurance amount.

Castellain v. Preston (1883):

Although this case primarily dealt with fire insurance, it reinforced the principle that
insurance contracts, in general, are not necessarily contracts of indemnity. The court
emphasized that the nature of the insurance contract depends on its terms and the type of
insurance involved. In the case of non-life insurance i.e. fire, marine etc., are contracts of
indemnity because the subject matter is a house, cargo, vessel etc which can be assessed in
terms of money and can be substituted or re-instated.

Fire Insurance and Contract of Indemnity

Unlike life insurance, a contract of fire like marine insurance is a contract of indemnity.
Time and again contracts of fire and marine insurance have been held to be contracts of
indemnity.

In Dalby v India and London Life Assurance Co, Parke J observed that policies of
assurance against fire and marine risk are both properly contracts of indemnity, the insurer
engaging to make good, within certain limited amounts, the losses sustained by the assured
in the buildings, ships and effects.17. Again Brett LJ, in Castellian v Perston said: The very
foundation, in my opinion, of every rule which has been applied to insurance law is this,
namely, that the contract of insurance contained in the marine or fire policy is a contract of
indemnity, and of indemnity only.18.

Indemnity has been held to be the controlling principle of insurance law. Therefore, if any
loss occurs by the event insured against, subject to the terms and conditions in the policy,
what the assured is entitled is not the entire value of the property insured but only the value
of the loss or damage caused to the property by fire. Even though fire occurs and the
property insured is damaged due to the wrongful act of a third party and if he received
compensation from the tort-feasor, to the extent he receives the damages, his claim against
the insurer is abated. On the other hand, if he receives money from the insurer and then
receives any money from a third party tort-feasor he must account for that amount to the
insurers. Likewise, if he acquires any right to sue for damages against a third party, the
insurer will be subrogated to that right. Again even when the property is insured with a
number of insurers, he is entitled to collect only the actual loss from the insurers together,
e.g., when he collects from the first insurer all the loss, the second and subsequent or other
insurers will not be liable to pay anything to the assured though inter se they may be liable
to contribute rateably to the insurer who has met with the liability entirely. The application
of the special doctrines of subrogation, contribution, option of reinstatement, etc is a sequel
to the principle that fire insurance is a contract of indemnity

Marine Insurance and Contract of Indemnity

Indemnity

Section 67: Extent of Liability of Insurer for Loss

(1) The amount the insured can recover for a loss under a policy, known as the measure of
indemnity, is:

• For an unvalued policy, the full insurable value of the insured subject-matter.

• For a valued policy, the full value fixed by the policy.

(2) If there is more than one insurer, each insurer is liable for their share of the measure of
indemnity. This share is based on the proportion of their subscription to the total value,
which is either the value fixed by the policy (for valued policies) or the insurable value (for
unvalued policies).

Section 68: Total Loss

In the case of a total loss of the insured subject-matter, the measure of indemnity is:

• For a valued policy, the value set by the policy.

• For an unvalued policy, the insurable value of the subject-matter.

Section 69: Partial Loss of Ship

If a ship is damaged but not totally lost, the indemnity is determined as follows:

1. If the ship is repaired, the insured is entitled to the reasonable cost of repairs, minus
customary deductions, but not exceeding the sum insured for any one incident.

2. If the ship is partially repaired, the insured can claim the repair costs and also
compensation for any depreciation due to the damage, but the total indemnity cannot
exceed the full cost of repairs.

3. If the ship is not repaired and not sold in its damaged state during the risk, the insured
can claim for depreciation due to the damage, but it should not exceed the reasonable
cost of repairs.

4. If the ship is sold in its damaged state, the indemnity will be based on the cost of
repairs, but not exceeding the depreciation from the sale value.

Section 70: Partial Loss of Freight

For partial loss of freight, the indemnity is calculated as the proportion of freight lost, based
on either the value set in a valued policy or the insurable value in an unvalued policy,
compared to the total freight under risk.
Section 71: Partial Loss of Goods, Merchandise, etc.

For partial loss of goods, merchandise, or other movables, the indemnity is:

1. If part of the goods insured by a valued policy is totally lost, the indemnity is the
proportion of the policy amount based on the value of the lost part compared to the
value of the whole.

2. If part of the goods insured by an unvalued policy is totally lost, the indemnity is the
insurable value of the lost part.

3. If the goods arrive damaged at their destination, the indemnity is based on the
difference between their gross sound value (the value in good condition) and the
damaged value, calculated as a proportion of the policy amount.

4. Gross value refers to the price of the goods before they are sold, including any pre-
paid charges like freight, landing charges, and duty. If the goods are sold under bond,
the bonded price is used as the gross value.

Section 72: Apportionment of Valuation

(1) If different types of property are insured under a single valuation, the insured value should
be divided among the different types based on their respective insurable values.

(2) If the exact cost of each type of property cannot be determined, the valuation can be
divided based on the net arrived sound value of each type of property or goods.

Section 73: General Average Contributions and Salvage Charges

(1) If the insured has paid, or is liable for, any general average contribution:

• If the subject-matter being contributed for is insured for its full contributory value, the
insured can recover the full amount of the contribution.

• If the subject-matter is not insured for its full value, the indemnity will be reduced in
proportion to the under-insurance.

• If there is a particular average loss that reduces the contributory value and for which
the insurer is liable, that amount will be deducted from the insured value when
calculating the insurer’s contribution.

(2) The insurer’s liability for salvage charges is determined similarly, based on the same
principles.

Section 74: Liabilities to Third Parties

When the insured has insurance against liability to a third party, the indemnity is the amount
paid or payable to the third party for that liability, subject to the policy's terms.
Section 75: General Provisions on Measure of Indemnity

(1) If there is a loss concerning any subject-matter not specifically covered in the previous
provisions of the Act, the indemnity will be determined as closely as possible according to
those provisions, as applicable.

(2) The provisions about indemnity do not affect double insurance rules or prevent the
insurer from proving that the insured has no interest in the subject-matter or that it wasn’t at
risk under the policy at the time of the loss.

Section 76: Particular Average Warranties

(1) If the policy states the subject-matter is warranted free from particular average, the
insured cannot recover for a partial loss, except in the case of a general average sacrifice.
However, if the contract is apportionable, the insured can claim for a total loss of any part.

(2) Even if the subject-matter is warranted free from particular average, the insurer is still
liable for salvage charges, particular charges, and other expenses incurred under the suing
and labouring clause to prevent a loss covered by the policy.

(3) Unless the policy provides otherwise, general average losses cannot be combined with
particular average losses to reach the specified percentage free from particular average.

(4) When determining whether the specified percentage has been met, only the actual loss
suffered by the insured subject-matter is considered. Costs for determining or proving the loss
are excluded.

Section 77: Successive Losses

(1) Unless stated otherwise in the policy, the insurer is liable for successive losses, even if
their total exceeds the sum insured.

(2) If a partial loss that has not been repaired is followed by a total loss, the insured can only
recover for the total loss. This does not affect the insurer's obligations under the suing and
labouring clause.

Section 78: Suing and Labouring Clause

(1) If the policy includes a suing and labouring clause, the insurer will cover any reasonable
expenses incurred by the insured for actions taken to prevent or reduce a loss, even if the
insurer has already paid for a total loss or the subject-matter was warranted free from
particular average.

(2) General average losses, contributions, and salvage charges are not recoverable under
the suing and labouring clause.
(3) Expenses incurred to prevent or reduce losses not covered by the policy are not
recoverable under the suing and labouring clause.

(4) The insured and their agents are required to take reasonable steps to minimize or avoid
any loss.