Indemnity and Professional Insurance
The term Indemnity is understood by a common man as a contractual agreement between parties in which one party agrees to pay losses or damages suffered by another party. Indemnity is also misunderstood as compensation, but there is a distinction between Indemnity and compensation or damages paid as former is more specific in its connotation.
Understanding Indemnity and Damages in the Indian Contract Act 1872
Before exploring the nuances between Damages and Indemnity, first, we need to understand the statutory wordings. The provision for Damages is Defined u/s 74 Compensation for breach of contract where penalty stipulated for – “When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.”
Whereas, section 124 stipulates the 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.”
Section 124 and 74 highlights some of the peculiar differences such as;
- In Indemnity, the indemnifier is liable for third party claims also, whereas damages can only be claimed from the party who breaches the contract.
- The claim of damages can only be brought after a breach of contract, unlike Indemnity claim which can be prior to the actual loss suffered.
- Indemnity clause makes provision for losses due to consequential, indirect and remote causes which are not covered by damages provision.
- For claiming damages there has been a direct relationship between damage caused due to breach of contract, but indemnity can be claimed without demonstrating it.
Also, it was held by the Bombay High Court while interpreting indemnity provisions in Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri that contract act is not exhaustive and during the conflict between Contract Act and judicial decisions, then Common Law principles associated with contracts will always be relied upon.
Professional Indemnity Insurance
Professional indemnity insurance, also referred to as professional liability insurance, is a type of business insurance for individuals or organisations involved in providing consultations or services, involving a high degree of skills such as Doctors, Architects, Accountants etc. This insurance covers the legal costs and expenses incurred as well as loss suffered due to compensation paid when they are sued by their clients on grounds of inadequate advice, services or designs that cause your client to lose money or cause any damage. Here, the insurance company acts as indemnifier and the professional is an indemnity holder.
Need for Indemnity Insurance?
In some jurisdictions, it is statutorily mandated to have indemnity insurance or can be made compulsory by the respective industry’s regulatory body. In India, it is compulsory for financial advisors post companies act,2013. Even if one is not obliged to have professional indemnity it is still better to have basic indemnity insurance as per industry requirements to mitigate future problems.
Cost of professional indemnity insurance?
In India, a premium for any cover is usually around 0.3 %- 1% of the sum insured.
Types of Professional Insurance AOA and AOY
Any policy pays the sum assured after maturity as in Life Insurance or on the claim as in Motor Insurance or Professional Insurance. The distinction between Anyone Accident (AOA) and Any One Year (AOY) is based on the sum insured. The sum insured is referred to as Limit of Indemnity and is fixed as per accident and per policy period. The ratio of AOA and AOY limit is the deciding factor for the amount payable for each accident or incident of negligence. The types of AOY and AOA ratios offered depend on the insurance company. It usually ranges from 1:1 to 1:4
For example, consider a doctor who has a professional indemnity insurance cover for Rs. 5,00,000 and has a policy of AOY-AOA ratio 1:2. In case he is liable to pay Rs.3, 00,000 as compensation for a lost cause, the company will only pay Rs.2, 50,000 since the policy has to cover two accidents in a year. Here, the practitioner will have a cover of the remaining Rs.2, 50,000 for another accident during the same period.
What does Professional Indemnity not cover?
A professional indemnity may not cover the claims arising from the following aspects of practice:
- Medical practice is done under the influence of alcohol or narcotics
- Intentional non-compliance, willful neglect, deliberate act
- The medical treatment is given for weight loss, plastic surgery, genetic damages, and conditions associated with AIDS
- A criminal act, penalties, fines, punitive, and exemplary damages
- Loss of goodwill
Things to remember while taking Professional Indemnity
- The limits of cover offered and under what circumstances.
- The instances where cover offered but entailed due to above-mentioned reasons.
- Ascertain the risk and exposure involved and to what extent the company is indemnifying
- The amount of premium involved which must be aligned with your budget
- Insurance broker services after-sale
- Contracting conditions and geographical limits
As consumers are getting more aware of their rights and professional duties, they are also garnering the judicial system’s empathy on grounds of a fiduciary relationship. It is imperative to have professional indemnity insurance for professionals such as doctors, accountants, etc that takes care of the legal and financial implications of the medical practice.
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