indemnity - Definition, What is indemnity, Advantages of indemnity, and Latest News - ClearTax (2024)

What Does Indemnity Mean?

The word indemnity literally means security, protection or coverage against loss.

What is a Contract of Indemnity?

• Section 124 of the Indian Contract Act, 1872 defines a Contract of 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 any other person.
• The objective of such a contract is to protect the promise against unanticipated losses.
• It is a form of a contingent contract, as the operation of the contract is incumbent on the occurrence of a particular event.
• It does not cover for the losses caused by an act of god, accident or the conduct of the promise.

Parties To Such A Contract

There are two parties namely, the promiser or the indemnifier and the promise or the indemnity holder. Their relationship can be illustrated as follows – Akhil promises to indemnify Prathibha from any losses incurred to her goods. Here Akhil is the indemnifier and the Prathibha is the indemnity holder.

Essentials to a contract of indemnity

• There must be an offer and acceptance.
• The contract must be entered into for a legal purpose.
• The contract must be entered for the purpose of protecting one from losses.
• The contract maybe express or implied from conduct.
• The parties to the contract must be capable of entering into the contract.
• The indemnifier is not liable until the loss has been suffered by the indemnity holder.
• The indemnity holder can compel the indemnifier to make good his loss although he or she has not discharged his or her liability.
• The liability of the indemnifier is primary and independent.

Insurance contracts and indemnity

As a rule of thumb, all insurance contracts save personal insurance contracts are contracts of indemnity. Therefore, the insurer, in light of this promise to indemnify, will put the insured to the same position that he or she was before the occurrence of the loss. The insured is not entitled to make any profit or loss by the operation of the insurance contract.