CONCEPT OF INDEMNITY

The word Indemnity means protection against financial problems. It occurs in the form of contract between the parties in which one party assures the other party to pay all the losses or damages borne by them. Section 124 of the Indian Contract Act, 1872 defines the 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, is called a "contract of indemnity”.” 

The most common example of a contract of indemnity is that indulged by the insurance companies. Let’s say, A took a car loan for Rs100000 from LIC on the condition that if his car met with an accident then the company will pay for the repair. LIC will indemnify him for the loss borne by him in getting his car repaired. 

Indemnification can be done in any way, either in the form of cash or in the form of repairment or by any other way as stated in the contract.

Indemnity is of two types: - Expressed Indemnity and Implied Indemnity

• Expressed Indemnity: This is a written agreement of indemnity in which all the terms and conditions are written that are supposed to be fulfilled and the parties to a contract are abode by them. They include indemnity contracts, insurance etc.
• Implied Indemnity: This is the duty to indemnify a party which arises from the circumstances or the acts of the parties. For example, in a principal-agent relationship, if principal refuses to accept the good transferred by his agent, the agent can sell those goods and if he bears any loss while selling, then the principal will pay it.

Indemnity Agreements for Board Directors:

For any company, it’s important to have a learned group of people as its Board of Directors. To have high-quality people, companies generally have the contract of indemnity which prevent them from every liability that may cause to them during their service as the Board of Directors.

It’s common for a company to have such provisions of indemnification etc. But many directors come into a specific contract that is permanent and doesn’t change due to any reason. Such specific contracts have a general clause stating that the company will bear any loss or damages caused to them during their service as the member of the Board of Directors.

 Example of the contract of Indemnity in Business:

The owner of a real estate has paid an insurance premium to an insurance company so that if a future bad incident occurred to the establishment, she can recoup the costs for any loss or damages. If the building sustains substantial structural damage from the blaze, then the insurance company will compensate the holder for the repair costs by reimbursing the owner or by reconstituting the damaged areas using its own approved contractors.