Extent of Indemnity in Insurance Claims

Indemnity in insurance compensates the beneficiaries of the policies for their actual economic losses, up to the limiting amount of the insurance policy. It generally requires the insured to prove the amount of its loss before it can recover. Recovery is limited to the amount of the provable loss even if the face amount of the policy is higher. This is in contrast to, for example, life insurance, where the amount of the beneficiary's economic loss is irrelevant. The death of the person whose life is insured for reasons not excluded from the policy obligate the insurer to pay the entire policy amount to the beneficiary.

Most business interruption insurance policies contain an Extended Period of Indemnity Endorsement, which extends coverage beyond the time that it takes to physically restore the property. This provision covers additional expenses that allow the business to return to prosperity and help the business restore revenues to pre-loss levels.[1]

Meaning of Indemnity under Indian Contract Act, 1872
Section-124 -
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 conduct of any other person." This Provision incorporates a contract where one party promises to save the other from loss which may be caused, either

(i) by the conduct of the promisor himself, or,

(ii) by the conduct of any other person.

Illustration to Section 124.-
A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

Indemnifier and Indemnified-
In a Contract of Indemnity, the person who promises to indemnify is known as "Indemnifier", and the person in whose favour such a promise is made is known as "Indemnified" or "Indemnity Holder".[2]

Meaning of Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be compensated.[3]

Historical Development of principle of indemnity
1. Indemnity was restricted only to the loss occured by human agency only.
In Gajanan Moreshwar vs. Moreshwar Madan.[4] It is stated :This definition covers indemnity for loss caused by human agency ONLY. 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 upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier.

2. Contractual document must state clearly the terms and conditions of indemnity.
In State Bank of India and another vs. Mula Sahkari Sakhar Karkhana Ltd.[5],. It is stated : A document, as is well known, must be construed on the basis of the terms and conditions contained therein. It is also trite that while construing a document the court shall not supply any words which the author thereof did not use. The document in question is a commercial document. It does not on its face contain any ambiguity. The High Court itself said that ex facie the document appears to be a contract of indemnity. Surrounding circumstances are relevant for construction of a document only if any ambiguity exists therein and not otherwise. The said document as per Supreme Court, constitutes a document of indemnity and not a document of guarantee as is clear from the fact that by reason thereof the appellant was to indemnify the co-operative society against all loses, claims, damages, actions and costs which may be suffered by it. The document does not contain the usual words found in a bank guarantee furnished by a Bank as, for example, "unequivocal condition", "the co-operative society would be entitled to claim the damages without any delay or demur" or the guarantee was "unconditional and absolute" as was held by the High Court. It is beyond any cavil that a bank guarantee must be construed on its own terms. It is considered to be a separate transaction.

Relation Between Indemnity and Insurance
Position in India-
It has been noted above that section-124 recognizes only such contract as a contract of indemnity where there is a promise to save another person from loss which may be caused by the conduct of the promisor himself or by conduct of any other person. It does not cover a promise to compensate for loss not arising due to human agency. Therefore, a contract of insurance is not covered by the definition of section-124. Thus, if under a contract of 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 contracts are valid contracts, as being contingent contracts as defined in section-31.

In United India Insurance Co. vs. M/s. Aman Singh Munshilal [6]. The cover note stipulated delivery to the consigner. Moreover, on its way to the destination the goods were to be stored in a godown and thereafter to be carried to the destination. While the goods were in the godown, the goods were destroyed by fire. It was held that the goods were destroyed during transit, and the insurer was liable as per the insurance contract.

Position in England-
Under English law, the word “indemnity” carries a much wider meaning than given to it under the Indian Contract Act. It includes a contract to save the promise from a loss, whether it be caused by human agency or any other event like an accident and fire. Under English law, a contract of insurance(other than lifeinsurance) is a contract of indemnity. Life Insurance contract is, however, not a contract of indemnity, because in such a contract different considerations apply. A contract of life insurance, for instance, may provide the payment of a certain sum of money either on the death of a person, or on the expiry of a stipulated period of time (even if the assured is still alive). In such a case, the question of amount of loss suffered by the assured, or indemnity for the same, does not arise. Moreover, even if a certain sum is payable in the event of death, since, unlike property, the life of a person cannot be valued, the whole of the amount assured becomes payable. For that reason also, it is not a contract of indemnity.

Conclusion
Indian Contract Act does not specifically provide that there can be an implied contract of indemnity. The Privy Council has, however, recognized an implied contract of indemnity also (Secretary of State vs. The Bank of India Ltd.)[7]. The Law Commission of India in its Report (13th Report, 1958, on Indian Contract Act, 1872) has recommended the amendment of section 124. According to its recommendation, “the definition of the ‘Contract of Indemnity’ in section 124 be expanded to include cases of loss caused by events which may or may not depend upon the conduct of any person. It should also provide clearly that the promise may also be implied.”

Citations　________________________________________________

1. Adjusting Today The Extended Period of Indemnity Endorsement
2. Indian Contract Act 1872, by Dr. R.K. Bangia, Edition-2009
3. Insurance Fundamentals by Dr. B.S. Bodla, edition-2004
4. A.I.R. 1942 Bom. 302, at p.303
5. 2006 (3) SCCD 1662
6. A.I.R. 1994 P. & H. 206.
7. A.I.R. 1938 P.C. 191