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;
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
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.
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.
A professional indemnity may not cover the claims arising from the following aspects of practice:
Things to remember while taking Professional Indemnity
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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