Insurance, is something that all of us know. It is a special type of contract which is called contract on Indemnity. I have tried to explain the same in brief in this article.
The concept of indemnity came into exitance from the idea to save a person from the losses he/she may incur. This promise may be express or implied. In the English law, the definition of indemnity is wide and it includes to protect the person from loss arising out of any cause but the Indian definition to the same is a little narrow. A famous English case is Adamson v. Jarvis. The section 124 of the Indian Contract Act, 1872 defines indemnity as follows
“124. “Contract of indemnity” defined. —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.” This section says that it is a contract in which one party promises to save the other party from any loss caused due to the conduct of the promisor or any other part to the contract.
The Sec. 125 of the Indian Contract Act states” 125. 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 any contract 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 any contract of indemnity, or if the promisor authorized him to compromise the suit.”
The person who is getting indemnified (promisor) is called the indemnity holder and the person indemnifying the other(promisee) is called the indemnifier. The sec.125 talks about the rights of the indemnity holder when sued. This means a promisee is entitled to recover from the promisor all damages which he is compelled to pay and the promise to indemnify the promisee applies, all the costs of the suit and all the money he must have paid in any compromise when he acts within his scope of authority.
The rule behind indemnity is that “one must be demnified before he/she is indemnified.” Which means that one must face a loss to seek recovery or be indemnified from the loss incurred. But this rule was not followed in the case of Gajanan Moreshwar v. Moreshwar Madam.
 (1827) 4 Bing 66: 5 LJ (OS) (CP) 68: 29 R R 503.
 AIR 1942 Bom 302 at p 304.