What Is Indemnity?

Indemnity is a broad type of insurance that compensates for losses or damages. If indemnity is used within the literal sense of the word, it can also mean the exclusion of liability for damages.

An indemnity agreement is a legal contract with two partners. In this agreement, one party will pay for damages or losses caused by the other party. One example is an insurance agreement, where the insurer or the Indemnitor is required to compensate one of the parties (the insuree or insured) for any losses or damages as compensation for the premiums that the insured pays towards the insurance company. In the event of indemnity, the insurance company assures the policyholder. That guarantees to compensate the business or individual for any loss covered.

KEY TAKEAWAYS

  • Indemnity is an all-encompassing kind of insurance to compensate for loss or damages.
  • In this arrangement the parties agree to cover any potential damages or losses caused by a different party.
  • An example of this is an insurance contract where the insurer, or indemnitor agrees to indemnify one of the parties (the insuree or insured) for any damage or losses in exchange for the premiums paid by the insured to the insurance company.

Acts of Indemnity

A clause of indemnity shields the people who have committed an illegal act from having to pay penalties. This is typically the case for public officials, like police officers or officials of the government who may be compelled to commit crimes of a criminal nature to fulfill the duties they are required to perform. Most often, the protection is given to individuals who were involved in an illegal activity to protect the public interest, for example, like the assassination of a well-known terrorist or dictator.

History of Indemnity

While indemnity agreements may not have ever had a name, they aren’t an entirely new concept. In the past, indemnity agreements have been used to facilitate collaboration between businesses, individuals, and governments.

In 1825, Haiti had to settle with France, which was then known as the “independence debt.” The money was intended to compensate for the losses French landowners “suffered” after losing land and enslaved people. 3 While this kind of indemnity was unjust, it’s just one of the many historical cases illustrating the different ways indemnity was used worldwide.

Another form of indemnity is the compensation the winning country demands from a losing nation following the conclusion of a war. Based on the size and the amount due, it could be years, or even decades to pay. A few of the more famous examples is the amount of indemnity Germany paid following its involvement as a participant in World War I. These reparations were paid back in 2010, more than one century after they were placed in the first place.

What is the reason I require an indemnity agreement?

Indemnity clauses can reduce the risk of the contract because they permit one party to be shielded against liability that arises from the actions of a different party. They can be particularly beneficial when an individual’s actions could result in a risk that the other party could be required to take on.

For instance, suppose the manufacturer sells its products to retailers. The retailer may be worried that, if the product isn’t as expected, it could be liable for consumer liability claims arising from the product. The retailer is likely to request an indemnity from the manufacturer against these claims so that it can be compensated should such claims arise.

When should you give an indemnity?

Indemnities can be used in a myriad of situations and there is no set rule for when an indemnity should be granted. It is contingent on the particulars and the nature of the contract (eg in the case of high risk) as well as the parties’ desire to give it and their bargaining power. One party in a better negotiation place is much more inclined to seek the indemnity of another party, and a counterpart in a weaker position is less likely to request for indemnity.

It is possible to get an indemnity:

  • One of the parties could be a victim of a loss as a result of the commercial transaction
  • the options available to the pure damage claim will not be enough to compensate the losses incurred

Some examples of contracts in which indemnities may be utilized are:

  • transfer of rights to intellectual property When the assignor is transferring IP rights to someone else, the assignor usually grants the assignee an insurance policy against losses they could be liable for due to defects in the rights
  • software license agreements for software: when a developer grants a business permission to use their software, there’s usually an indemnity clause that protects the company from responsibility arising out of using the program, such as when there are claims by third parties (eg when the company is accused of infringement because a third party copied the software)
  • When purchasing shares, the seller typically seeks an indemnity from the targeted business’s tax liabilities.

However the indemnities must be avoided within certain agreements:

  • confidentiality contracts that provide for an indemnity against breach of contract under the confidentiality agreement must be avoided as it could likely increase the responsibility of the party who is receiving confidential information, giving the disclosure party the right to seek reimbursement for all liabilities including costs, claims, and expenses that are incurred as a result of the breach, in contrast to the actual loss it endures
  • Consumer contracts Indemnities paid by consumers to businesses are typically deemed unjust and therefore prohibited.

Inclusion of the indemnity

Certain losses are not indemnifiable The losses that cannot be compensated include:

  • damage caused by the recipient’s intentional acts such as in an insurance agreement, the insured is not compensated if the trigger originates from their own intention action (for instance, if an insured sets fire to their home deliberately)
  • loss resulting from the fraud of the receiving party or infractions Indemnities don’t take care of the effects of the recipient’s own illegal actions

Limitation of responsibility under an indemnity

In some instances, the chance of damage resulting from the breach of contract could be greater than the amount of the contract, and the party liable for the breach may not be able to afford an uncapped indemnity. This is why parties often agree to reduce the liability of the repaid party by limiting the liability to a specified amount or to certain situations.

In the process of writing your indemnity clause

When you are writing your indemnity agreement When drafting your indemnity clause, think of:

  • the loss that a party could which loss a party could
  • how the loss could be incurred (ie what event or action should trigger the indemnity)
  • who will pay for them?
  • in what amount the indemnifying party has to be liable for these costs.

Depending on how the clause is constructed In accordance with the way it is drafted, indemnity may be used to cover:

  • all losses arising from an event that triggers The clause could be written broadly in order that the party who is indemnified must cover all losses ‘arising from or in connection with any trigger incident, regardless of how distant or indirect the cause may be.
  • an inventory of loss for greater certainty, an indemnity clause may be accompanied by a clause stating that the indemnity is for the specific loss like cost, liabilities tax, damages or penalties, etc.
  • directly incurred loss: the parties may reach an agreement on a specific indemnity agreement that limits the liability to the loss directly resulting from the trigger event
  • The most likely lose The indemnity may define what the party is required to pay if that trigger event occurs, and excludes all other expenses.

In general, the amount of indemnity must remain sensible and should not exceed what the law allows as damages in case of contract violation. An indemnity that provides 100% compensation for any loss resulting from the trigger event can be a very burdensome obligation which the law wouldn’t typically impose.

Consult a lawyer if you require assistance in the writing for an indemnity agreement.

Damages vs indemnityThe difference between indemnity and Damage

  • An indemnity claim could be filed prior to any breach of contract, but a damages claims are only filed upon the breach of contract.
  • The section 73 in the Act places a burden on the plaintiffs to limit their losses. Section 73 also declares that they cannot assert losses arising from their lack of mitigation, while Section 12 of the Act places no obligation of this kind on the indemnified party.
  • Indemnity is a right to claim losses arising from the conduct of a third party to the contract. At the same time, damages are only enforceable for losses arising from an action of either party in breach of the contract.
  • In the event of an indemnity clause relief can be sought to compensate for losses resulting from the actions of a third party that might not necessarily be a result of any breach. At the same time, damages can only be demanded if the contracting party commits a breach of contract.
  • The principle of indemnity is that it puts the person back to the position he was in before the loss happened. So, when someone is injured, he won’t gain or even lose money due to it. He will be reinstated to his previous place 2. In the event of financial damages, the award could be more than that the loss and less than what actually occurred. 3

Case law relating to the claiming of indemnity

In relation to the concept of indemnity, let’s look at the ruling from the High Court of Bombay in the case of Gajanan Moreshwar Paraelkar v Madan Mantri4:

The Court ruled that, in the context of the English common law, no action could be sustained until actual losses were suffered. The Court quickly realized that an indemnity could be worth nothing if the indemnified person could not claim his indemnity until he actually paid the amount. If a lawsuit were brought for him to be sued, the person would have wait until the judgment was rendered and only after he had complied with the judge that he could claim the indemnity. It is evident that this could in certain situations create an unreasonable burden on the indemnity holder. The indemnity-holder may not be able to pay the judgment, but he was unable to benefit from the insurance until he’d completed the process. Thus, that’s when the Court of equity stepped in and loosened the burden in the general law.

A Court of equity held that when his liability was absolute, then he could to either get the indemnifier to settle the claim or make payments to the Court enough money to create a fund to pay the claim when it was filed. The Court also ruled that Sections 124 and125 of the Indian Contract Act are not comprehensive of the law on indemnity, and that the Courts applying them would follow the same principles of equity that the Courts in England apply. In other words, if a person who is being indemnified has been liable and the liability is absolute and unavoidable, he has the right to appeal to the indemnifier to shield the person from that obligation and to repay it.”

Claiming of Damage –

In this instance, the insurance company claimed that the car in question had more passengers than was allowed as per this policy time of the incident. The defense offered by the insurer was denied.

The Court ruled that the mere act of carrying more people than the seating capacity allowed within the vehicle carrying goods by the insured doesn’t constitute a breach fundamentally of the conditions and terms of the policy, allowing the insurer to absolve itself of responsibility for the damages caused by the car. The Court in the case as mentioned earlier has concluded the following “it is plain from the terms of the Insurance Policy that the insured vehicle was entitled to carry six workmen, excluding the driver”.

Suppose the six workers, when traveling in the vehicle are not considered to be at an greater risk from the standpoint that of the Insurance Company on occurring of an accident. How could these additional people be said to have contributed to the cause of the accident? The position separating the load they were carrying. In this case, there was no driver at fault for the incident. The mere act of lifting someone or two or three times by the driver, or the cleaning staff of the vehicle without the awareness of the owner can’t be considered to be such a serious breach that the owner must, in any event, not receive compensation. The vehicle’s use was a bit irregular it was not essential in its nature as to end to the contract in the absence of any other factors that in themselves had contributed to causing the accident.

The Court ruled in reference to the decision that was made in B.V. Nagaraju v. Oriental Insurance Co. Ltd Divisional Officer Hassan6, so as to make sure that the insurer is not held liable. The breach of the policy or contract must be fundamental that it is a cause for bringing the contract to an end.

Author