Explained herein with Case laws the Relation between Indemnity and Insurance-whether insurance contracts are contracts of indemnity.
According to section 124 of the Indian Contract Act, 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 the conduct of any other person.
A contract where one party promises to save other from loss which may be caused, either
1. By the conduct of promisor himself
2. Or by the conduct of any other person
Definition given in Sec. 124 is very narrow. It includes only:
(i) Express promises to indemnify, and
(ii) The loss caused by the conduct of the promisor or any other person.
However, it does not include:
(i) Implied promises to indemnify, and
(ii) Loss caused by accidents and events not dependent upon the conduct of the promisor or any other person.
Section 124 does not cover a promise to compensate for loss not arising due to human agency [Gajanan Moreswar vs. Moreswar Madan]. Therefore, strictly speaking, contracts of insurance cannot be included in the definition.
In the case of New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao & Others, 1997, court held that a Contract of indemnity is a direct engagement between two parties thereby one promises to save the other harm. 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 on the conduct of indemnifier or any other person.
Thus, if under a contract for 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 a contract is valid contract as being contingent contract as defined in section 31.
However, it was not the intention of the legislature, as it has been held by Justice M.C. Chagla that “Sections 124 and 125 of the Contract Act are not exhaustive of the law of indemnity and the Courts here would apply the same equitable principles that the Courts in England do.” [Ganjanan Moreshwar v. Moreshwar Madan]
English Law has given a comprehensive definition which is as follows:
“A promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor.”
From the above definition it would be seen that it covers the loss caused by accidents and events not depending upon the conduct of any person. Thus it is much wider in its scope and as such, Indian Courts apply and definition given by England Law to Indian cases.
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