QS Study

Doctrine of Indemnity

An indemnity is an obligation by a person (indemnitor) to provide compensation for a particular loss solicited by another person (indemnitee). In a contract of indemnity, selection of proper sum insured is important as this is always the limit within which indemnity will be considered. The principle of indemnity is such a principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss.

Indemnities form the basis of many insurance contracts: for example, a car owner may purchase different kinds of insurance as an indemnity for various kinds of loss arising from the operation of the car, such as damage to the car itself, or medical expenses following an accident. In an agency context, a principal may be obligated to indemnify their agent for liabilities incurred while carrying out responsibilities under the relationship. While the events giving rise to an indemnity may be specified by contract, the actions that must be taken to compensate the injured party, are largely unpredictable, and the maximum compensation is often expressly limited. According to this principle insured should not gain profit from insurance contract as such subrogation and contribution clauses are there with this principle. In marine insurance, a contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured in the manner and the extent agreed upon.

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