Ndemnity Ntroduction

INDEMNITY; INTRODUCTION
Without any exception in time phrase, man always had and will have the propensity to secure
himself from the loss/ harm and with the span of time the concept of insurance begot. People
started to secure themselves from any uncertain event so that if that event occurs then they can put
themselves in the position in which they were before the occurence of that event. Gradually the
concept of insurance evolved and many new concepts were introduced within it some as a rule and
some based on equity. And in these concept, indemnity and subrogation were accommodated a
pertinent part.
It is obvious that Indemnity and Subrogation are very salient feature of the contract. If we confine
ourselves within the periphery of the contract and that too in facile and general term then the
indemnity principle applies where one party (indemnifier) assures another party (indemnity holder)
for the loss suffered because of the act of himself or any third party (indemnitor) that he/ she will
be compensated. But the incorporation of this principle only cinch that only one party will be
protected and he/ she would suffer no loss and if we leave this principle intact from here then it
will tantamount to grave injustice to the party who indemnified. So further to protect the interest
of the indemnifier, the principle of subrogation begets. Subrogation makes it certain that the
indemnifier will jump into the shoes of the indemnity holder and from then indemnifier will took
upon himself/ herself the rights and liabilities of the indemnity holder. Insurance is a contract
between insurer and insured for the protection of the insured from any future loss. Insurance is
type of indemnity in which insurer assures insured that he will be compensated for the loss. But
what if the loss has been caused because of act of any third party? Then after compensating insured
the insurer will be in the position of the insured to sue the third party. That is how the indemnity
and subrogation are very much pertinent for the discussion on the insurance law.
INDEMNITY; NOT ACTUALLY AS THE INDEMNITY IN CONTRACT BUT JUST THE PRINCIPLE
Insurance is a contract because it has all the elements of a contract; offer, acceptance,
consideration, legal object, consent and many others. Section 124 of 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 conduct of any other person. So, here in a
contract, in facile and general term, indemnifier promises to compensate by an act of himself or
any other person but at the same time taking a little aberration from this an indemnity in insurance
means the insurer promises to compensate insured against a loss suffered because of any future
uncertain event. So, it is not the indemnity in contract which applies here but the nitty-gritty of the
principle.
INDEMNITY; INTRODUCTION AND DEFINITION

Every contract of insurance, except life insurance, is no more than an indemnity. The insurer
undertakes, within the limit of the obligation, to compensate the insured for his actual loss, but
never to more than compensate. To the extent to which the insured is damnified, he will be
indemnified, but no more than indemnified.
According to the Cambridge International Dictionary ‘Indemnity’ is “Protection against possible

damage or loss” and the Collins Thesaurus suggests the words “Guarantee”, “Protection”,
“Security”, “Compensation”, “Restitution” and “Reimbursement” amongst others as suitable
substitute for the word “Indemnity”. The words protection, security, compensation etc. are all
suited to the subject of Insurance but the dictionary meaning or the alternate words suggested do
not convey the exact meaning of Indemnity as applicable in Insurance Contracts.
In Insurance the word indemnity is defined as “financial compensation sufficient to place the
insured in the same financial position after a loss as he enjoyed immediately before the loss
occurred.” Indemnity thus prevents the insured from recovering more than the amount of his
pecuniary loss. It is undesirable that an insured should make a profit out of an event like a fire or
a motor accident because if he was able to make a profit there might well be more fires and more
vehicle accidents. As in the case of Insurable Interest, the principle of indemnity also relies heavily
on the financial evaluation of the loss but in the case of life and disablement it is not possible to
be precise in terms of money.
Castellain v. Preston1 illustrated the operation of this principle as;
Every contract of marine and fire insurance is a contract of indemnity and of indemnity only, the
meaning of which is that the assured in a case of loss is to receive a full indemnity, but is never to
receive more. Every rule of insurance adopted in order to carry out this fundamental rule, and if
ever any proposition is brought forward, the effect of which is opposed to this fundamental
principle, it will be found to be wrong.2
USES OF INDEMNITY PRINCIPLE IN INSURANCE LAW

To avoid intentional loss
According to the principle of indemnity insurer will pay the actual loss suffered by the insured. If
there is any intentional loss created by the insured the insurer’s is not bound to pay. The insurer
will pay only the actual loss and not the assured sum (higher is higher in over-insurance).
To avoid an Anti-social Act
If the assured is allowed to gain more than the actual loss, which us against the principle of
indemnity, he will be tempted to gain by destruction of his own property after it insured against a
risk. So, the principle of indemnity has been applied where only the cash-value of his loss and
nothing more than this, though he might have insured for a greater amount, will be compensated.
INDEMNITY PRINCIPLE; CONDITIONS

The following conditions should be fulfilled in full application of principle of indemnity.
 The insured has to prove that he will suffer loss on the insured matter at the time of
happening of the event and the loss is actual monetary loss.
1
(1883) LR 11 QBD 380.
2
Ibid.
 The amount of compensation will be the amount of insurance. Indemnification cannot be
more than the amount insured.
 If the insured gets more amount then the actual loss; the insurer has right to get the extra
amount back.
 If the insured gets more amount then from third party after being fully indemnified by
insurer, the insurer will have right to receive all the amount paid by the third party.
 The principle of indemnity does not apply to personal insurance because the amount of loss
is not easily calculable there.
METHODS OF PROVIDING INDEMNITY

The Insurers normally provide indemnity in the following manner and the choice is entirely of the
insurer:
1. Cash Payment
In majority of the cases the claims will be settled by cash payment (through cheques) to the assured.
In liability claims the cheques are made directly in the name of the third party thus avoiding the
cumbersome process of the Insurer first paying the Insured and he in turn paying to the third party.
2. Repair
This is a method of Indemnity used frequently by insurer to settle claims. Motor Insurance is the
best example of this where garages are authorized to carry out the repairs of damaged vehicles. In
some countries Insurance companies even own garages and Insurance companies spend a lot on
Research on motor repair to arrive at better methods of repair to bring down the costs.
3. Replacement
This method of Indemnity is normally not preferred by Insurance companies and is mostly used in
glass Insurance where the insurers get the glass replaced by firms with whom they have
arrangements and because of the volume of business they get considerable discounts. In some
cases of Jewellery loss, this system is used specially when there is no agreement on the true value
of the lost item.
4. Reinstatement
This method of Indemnity applies to Property Insurance where an insurer undertakes to
restore the building or the machinery damaged substantially to the same condition as before the
loss. Sometimes the policy specifically gives the right to the insurer to pay money instead of
restoration of building or machinery.
Reinstatement as a method of Indemnity is rarely used because of its inherent difficulties
e.g., if the property after restoration fails to meet the specifications of the original in any material
way or performance level then the Insurer will be liable to pay damages. Secondly, the expenditure
involved in restoration may be much more than the sum Insured as once they have agreed to
reinstate, they have to do so irrespective of the cost.
LIMITATIONS ON INSURERS LIABILITY

1. The maximum amount recoverable under any policy is the sum insured, which is mentioned on
the policy. The amount is not the agreed value of the property (except in Valued policies) nor is it
the amount, which will be paid automatically on occurrence of loss. What will be paid is the actual
loss or sum insured whichever is less.
2. Property Insurance is subjected to the Condition of Average. The underlying principle behind
this condition is that Insurers are the trustees of a pool of premiums from which they meet the
losses of the few who suffer damage, so it is reasonable to conclude that every Insured should
bring a proper contribution to the pool by way of premium. Therefore, if an insured deliberately
or otherwise underinsures his property thus making a lower contribution to the pool, he is not
entitled to receive the full benefits. The application of this principle makes the insured his own
Insurer to the extent of underinsurance i.e. the pro-rata difference between the Actual Value and
the sum insured.
The amount of loss will be shared between the Insurer and the insured in the proportion of
sum insured and the amount underinsured. The formula applicable for arriving at the
amount to be paid by the Insurance Co. is Claim = Loss X (Sum Insured / Market Value)
Example: Mr. Kumar has insured his house for Rs.5 lacs and suffers a loss of Rs.1 lac due to fire.
At the time of loss the surveyor finds that the actual market value of the house is Rs.10 lacs. In
this case applying the above formula the claim will be as under:
Loss = 1 lac sum insured = 5 lacs Market Value = 10 lacs. Therefore, 1 lac X 5 lacs / 10lacs =
50,000/- Claim = Rs 50,000/-
LIFE INSURANCE; EXCEPTION TO INDEMNITY PRINCIPLE

The indemnity principle in insurance conch that insured will get what he lost. So, insured
in no way is going to get addition compensation than the amount of damage. Mulling over
then presents before us a fact that the subject which is insured can be calculated in monetary
term otherwise how anyone is supposed to pay equal to what has been damaged.
A life insurance, which is what its name suggests, is exception to this indemnity principle
and a non-indemnity insurance. Because of the simple reason that the value of a man can’t
be estimated or calculated. A life insurance contract does not resemble a contract of
indemnity because the insurer does not undertake to indemnify the assured for any loss on
maturity or death of the assured but promises to pay sum assured in that event. A policy of
insurance on one’s own life is not an indemnity because it is merely a contract to pay a
certain sum in the event of death. The assured merely pays the premium to the insurer in
order to secure a certain sum payable to him or to his representatives in case of death. There
is no question of indemnification in such a case, for the loss resulting from death, cannot
be estimated in money. Life insurance is adopted as a means of saving; the idea of
indemnity is foreign to it.

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INDEMNITY; INTRODUCTION

INDEMNITY; INTRODUCTION AND DEFINITION

According to the Cambridge International Dictionary ‘Indemnity’ is “Protection against possible

Castellain v. Preston1 illustrated the operation of this principle as;

USES OF INDEMNITY PRINCIPLE IN INSURANCE LAW

To avoid an Anti-social Act

INDEMNITY PRINCIPLE; CONDITIONS

METHODS OF PROVIDING INDEMNITY

LIMITATIONS ON INSURERS LIABILITY

LIFE INSURANCE; EXCEPTION TO INDEMNITY PRINCIPLE

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