Nature of Contract of Indemnity:

Introduction: Contract of indemnity is a Special Contract. The object of the contract of indemnity is limited to one aspect only i.e. to save the other from the losses causes to the other by the conduct of promisor himself or by the conduct of any other person.  The definition of contract of indemnity given in Section 124 of Indian Contract Act, 1872 is used in neuroscience.  The general law about contract of indemnity is much wider that that given in the Act.  The English law of indemnity is much wider that Indian law.  

                        The English law of indemnity includes promises to save the promise from harm or loss caused by events or accident, which do not, or may not depend on the contract of any person, or by liability arising from something done by the promisee at the request of promisor.  In the latter case, a promise of indemnity may be inferred as a fact from the nature of the transaction.  The Law Commission of India in its thirteenth report, 1958 had recommended that the definition of '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, and also to provide clearly that the promise may be implied.

Liability/ Rights of Indemnity Holder:

Section 125 of the India Contract Act, 872 deals with the nature, commencement and extent of liability of the promisor.

Rights of indemnity holder when sued –

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-

1. All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies.
2. All costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor and acted as it would have been prudent for him to act in the absence of indemnity, or if the promisor authorized him to bring or defend the suit;
3. All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor and was one which it would have been prudent for the promisee to make in the absence of anu contract of indemnity or if the promisor authorized hit to compromise the suit.

Thus Section 125 provides fot that promisor is liable to pay all damages, all costs and all sums to the promisee.  The liability of the promisee arises only in the event when indemnifier becomes liable to pay to the indemnity holder, such amounts as a stated in Section 125. The nature of the right of the promisor is contingent on actual payments required to be made by the promisee.  The nature and extend of liability is compensatory.

Case Law:      State of Orissa Vs. United India Insurance Co. Ltd. AIR 1997 SC 2671,

In this case Supreme Court held that contract of fire insurance or life insurance is a contract of indemnity.  The insured person has to prove the loss incurred to ascertain the liability of insurance company i.e. promisee.  Court also held that though contract of fire insurance or life insurance is not covered by the Section 124 it falls within the definition.