LAW OF CONTRACTS - DOUBLE INDEMNITY

(Term Paper towards partial fulfilment of the assessment in the

subject of Special Contracts)

Submitted by:
Anuj Bahukhandi
Roll No. 899
Semester- III
Submitted to:
Prof. Bipin Kumar
Assistant Professor (Law)

National Law University, Jodhpur

Summer Session
(July-November, 2012)

Table of Contents

INTRODUCTION...................................................................................................... 3
INDEMNITY............................................................................................................. 4
INSURANCE CONTRACT, IF CONTRACT OF INDEMNITY...........................................6
INDIA.................................................................................................................. 6
ENGLAND............................................................................................................ 6
RIGHTS OF INDEMNITY HOLDER.............................................................................7
DOUBLE INDEMNITY-AN ANALYSIS........................................................................10
CONCLUSION....................................................................................................... 23

INTRODUCTION

The concept of Double Indemnity as an important aspect of the Contract of Indemnity has not
yet been adopted and adapted by the Courts in India. As a consequence of the classical
concept of two physical individuals, having equal bargaining power, freely and voluntarily
entering into the contract, control over the terms of the contract was limited to the minimum.
In the present century, the use of double indemnity clauses in indemnity contract has become
very common and it is arguable that a customer who contracts on such standard terms has
been imposed on him and does not really agree to them at all. Indemnity agreements are
regularly used to allocate risk between parties on construction projects. Recently, some doubt
has surfaced as to whether the language found in a typical indemnity agreement is sufficient
to require indemnity in situations where the indemnifying party (the indemnitor) is without
fault.
Double indemnity Clauses in Indemnity Contractsthese types of contracts are found in our
everyday parlance and of course we forget to notice them in our day-to-day life and how it
goes on to affect our lives. These form of contracts have been in existence since ancient times
like Construction projects etc., which are in existence even now and has taken a much
complex form even today. Even in this era of technology and modernization there has opened
up various avenues for the double indemnity clauses like in insurance contracts, project
contracts etc. Now the question arises as to whether there is reasonability between two parties
when they are executing an agreement through an indemnity contract and as such the
restriction or exclusion, reflexive indemnity clauses.
There are clearly identifiable steps in the interpretation of contracts. First, the parties
common intention (that which they wanted to regulate) is sought; next, an attempt is made to
build up a picture of the relevant conditions, whether they be common or legally required
(those which, given the circumstances, the parties would have wished to establish, on either
rational or legal grounds); finally, the judge may end up applying legal provisions far
removed from the parties ex ante common will, such as the contra proferentem rule, whose
purpose is to prevent the use of unintelligible terms through the threat of applying, in each

such case, an interpretation in favour, not of whoever is responsible for creating such
unintelligibility, but of the other party.
Opinions differ and in this regard one school of thought says that double indemnity clauses
are an advantage whereas it is a disadvantage and it should be done away with. They come to
this conclusion as because a double indemnity contract is a universal contract having or
enumerating the same set of terms and conditions and the concept of vicarious liability
coming up in Contraction Contracts. Now in such type of contracts the question that arises is
that whether the other party has that same bargaining power or the freedom of contract as the
terms and conditions are one sided. As such through this project report an attempt is being
made to answer this basic problem and thus reach to a definite end in the course of this
research.

INDEMNITY

Contracts are generally concluded by offer and acceptance. Now according to dictionary
meaning, indemnity is a protection against loss, esp. in the form of a promise to pay, or
payment for loss of money, goods, etc. It is a security against, or compensation for loss etc.
For instance, A contracts to indemnify B in respect of a certain sum of 200 Rupees. This is a
contract of indemnity. In a contract of indemnity, the person who promises to indemnify is
known as indemnifier, and the person in whose favour such a promise is made is known as
indemnified or indemnity holder.
According to Section 124 of the Indian Contract Act, a contract of indemnity means a
contract by which one party promises to save the other from loss caused to him by the
contract of the promisor himself, or by the conduct of any other person. This provision
incorporates a contract where one party promises to save the other from loss which may be
caused, either
(i)

By the conduct of the promisor himself, or,

(ii)

By the conduct of any other person.

This definition covers indemnity for loss caused by human agency only. It does not deal with
those classes of cases where the indemnity arises from loss caused by events or accidents,
which do not or may not depend upon the conduct of the indemnifier or any other person, or
by the reason of liability incurred by something done by the indemnified at the request of the
indemnifier. In fact, however there are two types of indemnity clauses- they are the reflexive
indemnity clause and the insurance indemnity clause. Where the former indemnity requires B
who has successfully sued his fellow-but defaultingcontracting party A to indemnify A.
such clauses correspond very much to Viscount Dilhornes description of an indemnity clause
as the obverse of an exempting clause.1 The latter type of indemnity clause, the insurance
indemnity is triggered off when third party X recovers against contracting party A, or
exceptionally when the third party fails to recover and the indemnity is relied on to cover the
costs of litigation, the indemnity which is a term of the contract between A and B requires B
to indemnify A.
1 Smith v. South Wales Switchgear Ltd. [1978] 1 All E.R 18 at 22
5

Thus a combination of these two types of indemnity could give rise to another form of
indemnity i.e. an indirect reflexive indemnity. For example suppose A, a Site Developer,
contracts to do building work for B; A employs sub-Contractor X. X negligently injures B
and B sues X directly and recovers damages. X invokes an insurance indemnity against A and
A invokes a similar indemnity against B. it is also theoretically possible to have a straightforward indirect indemnity: A and B have a contract, A is in default vis--vis a third party X.
the contract with A requires B to indemnify X. For example Section 4 of the Unfair Contract
Terms Act 19772, applies only where a person deals as consumer and only where the liability
incurred is for negligence or breach of contract. Within these limitations the section covers
both our reflexive indemnity and insurance indemnity clause. Section 4(2) makes this very
clear.3
Now although Section 4 looks very clear to the untrained eye, but looking more closely we
see that a tricky point of interpretation arises. Suppose B who deals as consumer has entered
into a contract with A which contains an indemnity clause in As favour. A negligently injures
a third party X, and X can now successfully claim from A and A claims from B. extending
this example suppose A employs a sub-contractor C, and it is C who injures X. now X will
now successfully claim from C and C from A and A from B. To put things mildly, the same
problem would arise if C negligently injured B who duly claimed from A, thereby giving rise
to an indirect reflexive indemnity against himself.

2 Section 4 of the Unfair Contract Terms Act 1977 reads as:Section 4

(1) A person dealing as consumer cannot by reference to any contract term be made to indemnify another
person (whether a party to the contract or not) in respect of liability that may be incurred by the other for
negligence or breach of contract, except in so far as the contract term satisfies the requirement of
reasonableness.
(2) This Section applies whether the liability in question--(a) is directly that of the person to be indemnified or is incurred by him vicariously;
(b) is to the person dealing as consumer or to someone else.

3 John Adams, Roger Brownsword, Contractual Indemnity Clauses, J.B.L 200 (1982)
6

INSURANCE CONTRACT, IF CONTRACT OF INDEMNITY

INDIA
It has been noted above that section 124 recognizes only such contract as a contract of
indemnity where there is a promise to save another person from loss which may be caused by
the conduct of the promisor himself or by conduct of any other person. It does not cover a
promise to compensate for loss not arising due to human agency. Therefore a contract of
insurance is not covered by the definition of section 124. Thus if under a contract of
insurance, an insurer promises to pay compensation in the event of loss by fire, such a
contract does not come under the purview of section 124. such contracts are valid contracts,
as being contingent contracts as defined in section 31.
In United India Insurance Company v. M/s. Aman Singh Munshilal,4 the cover note stipulated
delivery to the consignor. Moreover, on its way to the destination the goods were to be stored
in a godown and thereafter to be carried to the destination. While the goods were in the
godown, the goods were destroyed by fire. It had been held by the court that the goods were
destroyed during transit, and the insurer was liable as per the insurance contract.

ENGLAND
Under English law, the word indemnity carries a much wider connotation than given to it
under the Indian Contract Act. It includes a contract to save the promisee from a loss, whether
it be caused by human agency or any other event like an accident and fire. Under English law,
a contract of insurance (other than life insurance) is a contract of indemnity.
Life insurance contract is, however not a contract of indemnity because in such a contract
different considerations apply. A contract of life insurance, for instance, may provide the
payment of a certain sum of money either on the death of a person, or on the expiry of a
stipulated period of time (even if the assured is still alive). In such a case, the question of
amount of loss suffered by the assured, or indemnity for the same does not arise. Moreover,
4 AIR 1994 P.& H. 206
7

even if a certain sum is payable in the event of death, since, unlike property, the life of a
person cannot be valued, the whole of the amount assured becomes payable. For that reason
also, it is not a contract of indemnity.
Indian Contract Act does not specifically provide that there can be an implied contract of
indemnity. The Privy Council has, however, recognized an implied contract of indemnity
also.5 The Law Commission of India in its 13th Report, 1958 on the Indian Contract Act,
1872, has recommended the amendment of Section 124. According to its recommendation,
The definition of the Contract of Indemnity in Section 124 he expanded to include cases of
loss caused by events which may or may not depend upon the conduct of any person. It
should also provide clearly that the promise may also be implied.

RIGHTS OF INDEMNITY HOLDER

In a suit against the indemnity holder, he may have been compelled to pay damages, and
incurred costs, etc. In his own turn, he can bring an action against the promisor (indemnifier)
to recover damages and costs, etc. paid by him, if the indemnifier has promised an indemnity
in such a case. The provision in this regard is contained in Section 125, which reads as under:
Right 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

5 Secretary of State v. The Bank of India Ltd. AIR 1938 P.C 191
8

have been prudent for the promise to make in the absence of any contract of indemnity, or if
the promisor authorized him to compromise the suit.
When can an indemnifier be made liable? Can he claim to be indemnified before he is
demnified?
There has been a controversy regarding the point, as to whether the indemnifier can be asked
to indemnify before the indemnity-holder has actually suffered the loss, or his liability arises
only after the loss has been suffered by the indemnity-holder.
According to English Common Law, no action could be brought against the indemnifier until
the indemnity-holder had suffered actual loss. This situation created a great hardship in those
cases where the indemnity-holder was not in a position to meet the claim out of his pocket.
Relief was provided to indemnity-holder in such cases by the Court of Equity. According to
the rules evolved by the Court of Equity, it was no more necessary for the indemnity-holder
to be demnified before he could be indemnified. In other words, the indemnity-holder can
now compel the indemnifier to save him from the loss in respect of liability against which
indemnity has been promised.
There has been a difference of opinion between various High Courts in India as to whether
the indemnity-holder can claim indemnity before he has actually suffered the loss.
According to the view expressed by the different courts, that a person must be demnified
before he can be indemnified, i.e. no indemnity can be indemnified, i.e. no indemnity can be
claimed until the indemnity-holder has already actually suffered the loss.
Whereas the high Courts of Bombay6, Calcutta7, Madras8 and Allahabad9 have expressed a
different view, and they are in favour of the application of law similar to the one recognized
in England by the Court of Equity. According to the decisions of these courts, an indemnityholder can compel the indemnifier to indemnify even before the indemnity-holder has
actually suffered the loss.

6 Gajanan Moreshwar v. Moreshwar Madan AIR 1942 Bom 302

7 Prafulla Kumar v. Gopee Ballabh Sen I.L.R (1944) 2 Cal 318
8 Ramalinga v. Unnamolai AIR 1938 Mad 791
9 Abdul Majeed v. Abdul Rashid, AIR 1936 All 598
9

Referring to the equitable principle and also the desirability of its being followed in India,
Chagla, J. while delivering the judgement in the Bombay High Court decision of Gajanan
Moreshwar v. Moreshwar Madan10, observed:
The Court of equity held that if his (indemnity-holders) liability had become absolute, then
he was entitled either to get the indemnifier to pay off the claim or to pay into Court
sufficient money which would constitute a fund for paying off the claim whenever it was
made..I have already held tat Section 124 and 125, Contract Act, are not exhaustive of the
law of indemnity and the Courts here would apply the same equitable principle that the
Courts in England do. Therefore, if the indemnified has incurred a liability and that liability is
absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay
it off.
The Law Commission of India in its 13th Report, 1958, has expressed the opinion that the
view expressed by Chagla J., is correct and should be adopted by the legislature. The Law
Commission recommended that as in English Law, the right of the indemnity-holder should
be more fully defined and the remedies of an indemnity-holder should be indicated even in
cases where he has not been sued.
Now all the reported cases on indemnities in fact involve insurance rather than reflexive
indemnity clauses and nearly always the point in issue is whether or not a negligent proferens
(the party for whose benefit the indemnity purports to operate) can rely on the indemnity. An
insurance indemnity clause in a commercial contract, like an exemption clause is usually
aimed at apportioning insurance risks. A reflexive clause may also fulfil this function. Until
recently, however this has received little open recognition in the courts. Perhaps because of
the more obviously commercial context of indemnity clauses than of exemption clauses there
is, however, a competing line of authority. It holds that the overriding consideration is the
intention of the contracting parties as expressed in their contract. If the parties have used
words which are apt to allow the indemnity to operate in favour of the negligent proferens
then effect must be given to the clause. This is the orthodoxy of The Freedom of Contract.

10 AIR 1942 Bom 302 at 304

10

DOUBLE INDEMNITY-AN ANALYSIS

Indemnity agreements are regularly used to allocate risk between parties on construction
projects. Recently, some doubt has surfaced as to whether the language found in a typical
indemnity agreement is sufficient to require indemnity in situations where the indemnifying
party (the indemnitor) is without fault.
Courts have a legitimate paternalistic function, even relative to commercial contracts, to
ensure that powerful commercial parties do not abuse their bargaining strength by foisting
indemnity clauses on weaker parties. Another answer is that negligent parties should be
allowed to answer personally for their default, and not be allowed to pass on the risk to an
innocent party. Against these responses, of course, there are well-rehearsed objections. The
problem with the courts having an interventionist role is that commercial parties simply will
not know where they stand. The collective message of these decisions is clear: Parties should
take care to ensure that the language in their indemnity agreements properly states the scope
of indemnification intended.11
Three recent California Court of Appeal cases have addressed this issue. Yet, despite
substantially similar language in each of the agreements at issue, the cases reached different
outcomes. In two cases, the courts held that the agreements required indemnification even
though the subcontractors were not at fault. In the other case, the court ruled that the language
of the agreement was not explicit enough to require indemnification without a finding of
fault.
A typical indemnity agreement is designed to shift liability to the party who is thought to be
more actively or primarily responsible for the events giving rise to the liability.
Subcontractors commonly are required to indemnify a general contractor for any acts for
which the general contractor is less than 100 per cent responsible. But in some cases, the
subcontractor is no more at fault than the general contractor. In these cases, the question of
whether the agreement requires indemnification becomes one of interpretation. As a result,
courts examine the language that parties use in their agreement to determine their intent -even if they did not actually consider the possibility of indemnification without fault.
11 John N. Adams and Roger Brownsword, Double IndemnityContractual Indemnity Clauses
Revisited, J.B. L 146 (1988) at 153
11

The first case in the recent trilogy of opinions is Continental Heller Corp. v. Amtech
Mechanical Services, Inc.12. There, Amtech, Continental's subcontractor installed a valve
manufactured by a third company in the course of its work at a meat-packing plant. The valve
failed and caused an explosion that injured employees and damaged property. The agreement
required Amtech to indemnify Continental Heller for loss which [arose] out of or [was in]
any way connected with Amtech's acts or omissions in the performance of its work. While
the court agreed that Amtech did not install the valve negligently, it found that Continental
Heller did not need to show that Amtech was at fault in order to claim indemnity. The court,
following the explicit language in the agreement, found that Continental Heller was entitled
to indemnity because Continental Heller's loss was connected to Amtech's act of installing the
valve.
The Continental court also remarked on the commercial context of the case as well as issues
concerning public policy. Both Amtech and Continental were large, sophisticated firms that
had carefully negotiated their indemnity agreement. Thus, the court felt Amtech had ample
opportunity to negotiate the terms of its indemnity obligations. Moreover, Amtech's
subcontract was worth $1.2 million while it only was required to indemnify Continental for
$20,000. The court seems to have relied upon these factors to support its broad interpretation
of the indemnity agreement.
In Heppler v. J.M. Peters Co.13, class action plaintiffs, standing in the shoes of the developer,
sought indemnity from three subcontractors who worked on a residential development. The
indemnity agreements provided that the subcontractors would hold the contractor harmless
from all claims arising out of or in connection with the Subcontractor's... performance of the
Work. While neither negligence nor fault was explicitly referenced in the indemnity
provision, the court nevertheless ruled that fault on the part of the subcontractor was a
prerequisite for indemnity based on other clauses in the contract. It noted that the language
did not evidence a mutual understanding of the parties that the subcontractor would
indemnify... if it was not negligent. Although the language in the agreement was
substantially similar to that in Continental Heller, the court explicitly distinguished the two
12 53 Cal.App.4th 500 (1997) cited from
http://www.constructionweblinks.com/Resources/Industry_Reports__Newsletters/August_21_2000/in
demnity_clauses.htm <Last Visited on 24-08-06>
13 73 Cal.App.4th 1265 (1999) cited from
http://www.constructionweblinks.com/Resources/Industry_Reports__Newsletters/August_21_2000/in
demnity_clauses.htm <Last Visited on 24-08-06>
12

cases based on the language found in their respective agreements. Significantly, it noted that
the agreement in Heppler did not contain the any acts or omissions language found in the
agreement in Continental Heller.
The Heppler court also focused on the commercial context of the indemnity agreement and
the public policy concerns it raised. In contrast to Continental, the subcontractors signed preprinted form agreements prepared by the more sophisticated developer. Further, if the
subcontractors had been forced to indemnify the developer, they truly would have been
"saddled with ruinous liability" amounting to over $5.3 million. These facts supported the
court's restrictive interpretation of the indemnity agreement at issue.
Finally, in Centex Golden Construction Co. v. Dale Tile Co.14, Centex, the general contractor,
sued Dale Tile, the subcontractor, for indemnity based on defective tile work on a commercial
building. At trial, the jury found that Dale Tile had not been negligent in its work on the
project, but the court ruled for Centex on its indemnity claim. As in Continental Heller, the
Court of Appeal agreed that under the agreement, Centex did not need to show fault on the
part of Dale Tile to prevail. The indemnity agreement stated that all work performed by Dale
Tile "shall be at the risk of subcontractor exclusively." The court found that, even more than
the language in the agreement in Continental Heller, this expression by the subcontractor was
sufficient to provide indemnity in the absence of fault. As in Continental Heller, the Centex
court further justified its ruling by noting the case's commercial context and the absence of
public policy concerns.
In each of the three cases, the courts were careful to note that the intention of the parties is to
be ascertained from the 'clear and explicit' language of the contract, and that when
interpreting indemnity agreements, the courts look first to the words of the contract to
determine the intended scope of the indemnity agreement. While none of the agreements
explicitly addressed the subject of indemnity when the subcontractor was without fault, each
of the courts confidently stated that their interpretation of the language in the agreements was
consistent with the "intention" of the parties.
To be sure, parties to indemnity agreements should not have to rely on a court's skill at
creative interpretation in order to achieve a favourable result. The lesson learned from these
14 78 Cal.App.4th 992 (2000) cited from
http://www.constructionweblinks.com/Resources/Industry_Reports__Newsletters/August_21_2000/in
demnity_clauses.htm <Last Visited on 24-08-06>
13

decisions is that typical indemnity agreements may be ill equipped to deal with claims that do
not arise out of the indemnitor's fault. Thus, parties to construction contracts should take care
that their true intentions on the issue of indemnity are manifested in clear and explicit
language.
In a construction project in Florida, if an individual or the individuals agent acts wrongfully
by action or inaction that results in property damage or personal injury, a contractor, lower
tier contractor, architect, engineer, or material supplier will indemnify that person and hold
them harmless for their own wrongful act, omission, or default. Except for the year 2000,
clauses containing such indemnifications were and are enforceable in Florida if certain
conditions were met, which are described below. This concept of indemnification for ones
own wrongful acts is discussed in an article at 68 A.L.R.3d 7 (1976), and raises interesting
questions.15

Is it fair for one person to be responsible for the wrongful or negligent acts of another person?
Is the answer to this question any different if the person agrees to take on that responsibility
by a contract? Is it reasonable to believe that most people signing construction contracts
understand that they are indemnifying the other side from their own negligence? For those
people in construction who sign such contracts and understand what an indemnity clause is,
there are three basic schools of thought on whether a contractual undertaking to hold
someone harmless from that other persons own wrongful acts is fair.
One school of thought, adopted in several states in the U.S is that the concept of holding
someone harmless from that persons own wrongful acts is simply wrong, not fair, against
public policy, and should not be enforced in any event.
The second school of thought, at the other end of the spectrum, is that people in the
construction business should be able to understand the terms to which they are agreeing. If
they dont comprehend their responsibility, they should obtain advice to allow them to
understand before agreeing to an indemnity undertaking. Further, the parties to a contract
should be free to allocate the risks arising out of a construction project as they see fit and
there is nothing wrong with an individual agreeing to be responsible for the property damage
15 http://www.legalmart.com.au/topics/business/it_ecom/true_story_1.asp <02-09-12>
14

or personal injury that another person causes if the indemnitor willingly subscribes his name
to such an indemnity clause.
The third school of thought (a middle ground) is that such indemnity clauses are subtle, not
easily understood, and, in order to be enforceable, they should include some limitation on, or
warning regarding, the duty to hold someone harmless from that persons own wrongful acts.
Such indemnity should be distinguished from an indemnity for one person to hold another
harmless from actions done by the first party, or others working under him. While that may
be addressed by contract, it is also addressed in the common law, known as common law
indemnity. The subject of this article regards holding one harmless from property damage or
personal injury that such individual causes. There is no common law indemnity for that
situation. Indemnity for that only arises when agreed in a contract. Florida law evolved from
having no statute addressing such clauses (pre-1972), to requiring monetary limits or specific
consideration for such clauses as a condition of enforceability (1972-2000), to subtly making
such clauses unenforceable for all construction parties (2000-2001), to making them
enforceable for construction parties so long as there is a monetary limit on the indemnity of
not less than $1,000,000 per occurrence, which limit must bear a reasonable relationship to
the contract, is a part of the project specifications or bid documents, if any, and has other
limits on intentional, reckless, and wanton acts.16
In Aschenbrenner v. United States F. & Guarantee Co.,17 Mr. Justice Stone delivered the
opinion of the Court. Petitioner, a beneficiary of a policy of accident insurance issued to her
husband by respondent, brought this suit in the District Court for Northern California to
recover under the double indemnity provisions of the policy. At the trial liability was
conceded for the single amount stipulated to be paid in the event of the insured's death by
accident, but double liability was contested on the ground that the insured, at the time of the
accident, was not a passenger on a common carrier within the meaning of the double
indemnity provisions of the policy. A judgment entered upon a verdict for the petitioner for
the double liability was reversed by the Court of Appeals for the Ninth Circuit, which
directed that judgment be reduced by one-half. 65 F.(2d) 976. Certiorari was granted.18

16 http://www.nmmlaw.com/articles/contr_indem.html <last visited on 27-08-12>

17 292 U.S. 80 (1934) cited from http://caselaw.lp.findlaw.com/scripts/getcase.pl?
court=us&vol=292&invol=80 <Last Visited on 03-09-06>
18 Ibid at 80, 82
15

The policy provided for payment of a specified amount in case of loss of life of the insured
resulting from accidental bodily injury, and for payment of double that amount 'if such injury
is sustained by the insured while a passenger in or on a public conveyance (including the
platform, steps or running board thereof) provided by a common carrier for passenger
service. The insured, which had in his possession a ticket entitling him to transportation,
arrived at the railroad station platform just as the train started to move out of the station.
There was testimony from which the jury might have found that, while the train was moving
at a speed of seven to ten miles an hour but was still within the station and opposite the
platform, with vestibule doors open, the insured jumped onto the lower step of a car, his hand
grasping the handrail, and that he continued for a brief time, while the train moved about
twenty feet, to stand with both feet upon the step but with a small part of his body or clothing
projecting beyond or outside the vestibule until it brushed against a bystander on the platform
in a manner causing the insured to lose his hold and fall to his death.
The trial judge instructed the jury that if the insured held a ticket entitling him to ride as a
passenger, and in attempting to board the train while in motion he stood with both feet upon
the step, he was a passenger and entitled to recover under the double indemnity clause. The
only question which it is necessary to decide here is whether the insured was a 'passenger' at
the time of the accident within the meaning of the policy. The Court of Appeals ruled that he
was not19; it reached this conclusion by applying the term as it was said to be defined in the
law of common carriers.
The Court of Appeals thought that the evidence here would have made no case for the jury in
a suit against the carrier, and therefore concluded that the trial judge should have directed a
verdict for the insurer on the issue of double indemnity. No doubt intending passengers, who
are injured in attempting to board a moving train, unless they were invited to do so, are not
usually entitled to recover from the carrier. But it is not clear that such cases turn on the
existence or non-existence of the passenger-carrier relationship.20
And in the case of the insured, who had come upon the station platform intending to be a
passenger, it may be that negligence in jumping uninvited onto the moving train would bar
his recovery from the carrier without resort to the artificial assumption of a hiatus in that
19 Ibid at 83
20 Id at 81
16

relationship during the brief interval required for boarding the train. The notion of such a
suspension of the passenger-carrier relationship has been rejected in allowing recovery upon
policies insuring against injury while travelling as a 'passenger' on a railway train, both where
the passenger alighted from the train at an intermediate stop and was injured in attempting to
return to the train after it started to move again.
But it is unnecessary here to follow the niceties of legal reasoning and terminology applied in
negligence suits against common carriers, for we are interpreting a contract and are
concerned only with the sense in which its words were used. The phraseology of contracts of
insurance is that chosen by the insurer and the contract in fixed form is tendered to the
prospective policyholder who is often without technical training, and who rarely accepts it
with a lawyer at his elbow.21 So if its language is reasonably open to two constructions, that
more favourable to the insured will be adopted, and unless it is obvious that the words are
intended to be used in their technical connotation they will be given the meaning that
common speech imports.
That the stipulation to be construed is one for double indemnity calls for no different
conclusion. It has been argued that such a provision contemplates a risk which is
comparatively slight, and that therefore it should be strictly construed. 22 It may be that the
insurer assumes little additional risk; but the terms of the clause disclose an inducement to
insure set forth in attractive detail. The policy contains no exceptions exempting the insurer
from liability if the injury is caused by negligence of the insured, or restricting the liability to
accidents occurring only after a point of safety has been reached, and the steps of a car are
specifically included in the place where injury insured against may occur. Nothing in the
policy gives any hint that words in this clause are used more narrowly than those in any other.
The insurer has chosen the terms, and it must be held to their full measure in this clause, as in
any other, whether its promise be for more or less. The Decision was reversed.
In Petrofina (UK) Ltd v. Magnaload23, the tragic background to this action is, of course, well
known. On the evening of 6 July 1988 the Piper Alpha oil platform which was located in the
North Sea some 110 miles north-east of Aberdeen was destroyed in a massive conflagration.
21 Id at 85
22 Id at 86
23 [1994] QB 127
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166 persons lost their lives and many of those who survived suffered varying degrees of
injury or trauma. The accident was the worst disaster in the history of the British off-shore oil
industry.
Following the accident the families of the deceased and the survivors presented claims
against the platform operators Occidental Petroleum (Caledonia) Ltd (OPCAL). As is so
often the case these claims were threatened to be brought not in Scotland, but in Texas. Here
it was perceived that damages, substantially higher than those likely to be awarded in
Scotland, might be awarded.
Negotiations took place throughout the autumn of 1988 between representatives of the
victims and lawyers appointed by OPCAL's Insurers. Eventually an agreement was arrived at
whereby OPCAL would pay damages to victims to be assessed on a "mid-Atlantic basis".
This represented an approximate mid waypoint between Texas and Scottish levels of
damages. These damages were met by OPCAL's liability Insurers subject only to the usual
deductibles and a self-insured gap in coverage which became known as "the Oxy gap".
Having paid out very substantial sums in damages OPCAL's Insurers sought to bring in the
name of OPCAL (which had, by then, been re-named Elf Caledonia Ltd) a series of
subrogated claims against the various contractors whose employees were killed or injured.
These claims were based on the terms of certain indemnities contained in the contracts under
which the contractors were employed. The contracts were subject to Scottish Law.
At the end of an extremely lengthy trial Lord Caplan arrived at what, to the insurers involved,
seemed to be a quite extraordinary conclusion. He held that
"My conclusion ...is that the Insurers of OPCAL and their Participants do not have any rights
of subrogation in respect of the indemnities granted by the Contractors. [OPCAL] no longer
have any title or interest to sue the Contractors. This means that if Insurers wish to recover
their outlay this would have to be by way of a separate action based on contribution."
This finding has, not surprisingly, caused considerable concern amongst many Insurers and
their advisors. It is, however, important to clarify from the outset the scope of this finding. In
particular it should be understood that Lord Caplan is not saying that in all Scottish cases
rights of subrogation do not exist. Nor that in Scotland subrogated claims must be brought in
the name of Insurers and not their assured.

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Far from it, in fact, Lord Caplan expressly reaffirmed the well known principles of
subrogation. These apply just as much to Scottish cases as they do to English ones. Lord
Caplan's judgment does however raise an important issue as to the nature of subrogated
claims and the circumstances under which they can be brought.
The subrogation issue arose very late in the hearing. The first time it was raised was on the
last day of the defendants closing submissions on day 381 of the trial. Rumour has it that one
of the Scottish defence counsel thought up the point late in the trial whilst having a well
earned soak in his bath. Whether he leapt out of the bath with the cry of och aye eureka is
not known but it is certainly an ingenious argument. In order to understand the issue it is
necessary to briefly look at the origins and history of the doctrines of both subrogation and
contribution.
The concept of subrogation is a very old. It dates back to Roman law under which a third
party, who met a debt for which someone else was liable, was able to be subrogated to the
rights of the creditor against the debtor. The principle has been recognised in English law for
many centuries. The exact origins and basis of the doctrine has, however, long been the
subject of judicial debate. It seems to have been accepted for at least the last 100 years that
the doctrine is based on the nature of a contract of indemnity and is not unique to contracts of
Insurance. There are however two distinct schools of thought. The first consider that its
origins lie in principles of equity. The second consider that the insurers rights of subrogation
arise out of terms implied by the operation of law into the contract of insurance.24
In the vast majority of cases the question of which school of thought is correct is little more
than of academic interest. Whatever the precise background of its origins the rationale and
basic principles are well known. The rationale is twofold, both firmly based on the concept of
fairness. First, that an assured should not be able both to make a recovery under the terms of
his policy from his insurers and keep the proceeds of any recovery that might be made from a
wrongdoer whose negligence or breach of contract caused the loss. Secondly, that the
wrongdoer should not be relieved of his liability merely because the assured has been prudent
enough to take out insurance.
24http://www.lexisnexis.com/community/insurancelaw/blogs/insurancebytespoweredbynewapplema
n/archive/2011/09/06/subrogation-new-appleman-on-insurance-law-library-edition-chapter-49.aspx <
Last Visited on 29-08-12>
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From this desire to ensure fairness the basic principles of subrogation have evolved. In
particular the rights of insurers to bring a subrogated claim against a wrongdoer arise on
payment by the insurers under the policy. They can only be exercised in the name of the
assured. The insurer is subrogated to any claim which the assured is entitled to bring to
diminish his loss (provided those rights are connected with the subject matter of the
insurance).
There are however limitations. For example, where the assured has caused his own loss, but
has a claim under a policy, the insurers cannot seek any set off as against their assured as
wrongdoer. Similarly there are practical restrictions on bringing subrogated proceedings in
the name of one assured against a negligent co-assured who also has an interest in the subject
matter of the insurance. Such claims sometimes (but not always) fail by reason of circuity of
action see. Other examples can be found where under the terms of the policy Insurers waive
their rights of subrogation against an identified party.
Richard Aikens QC wrote an excellent article in the May 1997 edition of the 'British
Insurance Law Association Journal' in which he explained in some depth the circumstances
whereby underwriters are or are not able to bring a subrogated claim in the name of one coassured against another.
Further, it is important to distinguish a genuine subrogated claim brought in the name of the
assured against a wrongdoer from a claim for contribution. Claims for contribution can arise
whenever a party has rights of indemnity against more than one person. The most common
examples of a claim for contribution happen when assureds have taken out double insurance.
The basic principles of double insurance are well known although in practice they can create
considerable difficulties. It is perfectly lawful for an assured to insure any subject matter in
which he has an insurable interest as many times as he likes. Provided, of course, that the
purpose of such double insurance is not fraudulent. This does not mean that the assured can
recover more than his loss. In a case where an assured is over-insured by reason of double
insurance he will be limited to recovering his actual loss and no more. He has however
(subject to express policy terms) the right to choose which of his insurers he wishes to
recover from.

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If the paying insurer had no remedy against his co-insurers this could lead to an injustice. The
courts, however, provide an equitable solution. The insurer is not entitled to make a
subrogated claim in the name of his assured under the alternative policies. However, subject
to some rather complex rules and the precise terms of the relevant policies, the paying insurer
is often entitled to make a claim against his co-insurers for an equitable contribution. This
claim has to be distinguished from a subrogated claim as it is brought in the Insurers own
name and is not for the full sum insured under the alternative policies.
The difficulties OPCAL's insurers have experienced flow directly from the doctrine of
contribution. The subrogated claim being brought by insurers in the name of the Piper Alpha's
operators against the contractors was being made pursuant to the terms of the relevant
contracts which existed between them. Although the precise terms varied between the various
contractors they all contained a series of indemnities a representative example of which
reads:
"The contractor shall indemnify, hold harmless and defend OPCAL ...against any claim,
demand, cause of action, expense or liability (including but not limited to costs of litigation)
arising ...by reason of ...injury to or death of persons employed by... the contractor
...irrespective of any contributory negligence, whether active or passive, of the party to be
indemnified, unless such injury or death was caused by the sole negligence or wilful
misconduct of the party which would otherwise be indemnified."
The applicability of this clause was hotly contested by the contractors who argued that the
deaths and injuries suffered by their employees were caused either by the sole negligence of
OPCAL or by their wilful misconduct. Lord Caplan however found that the disaster was not
caused by the sole negligence of OPCAL, or by their wilful misconduct. Importantly, he also
held that the loss was not caused by the wrongdoing of any of the contractors who were
defendants to the action.
In his judgment Lord Caplan recorded the fact that insurers who paid out in the first instance
should either be able to recover their whole outlay through subrogation or a proportionate
part of their outlay through contribution. He went on to say that, obviously they could not do
both as the remedies were mutually exclusive. Having confirmed that, in respect of a claim
against a wrongdoer, subrogation is the appropriate remedy he went on to state:
"If a party enjoys the benefit of two or more indemnities granted to him to cover a particular
loss then if that loss emerges he can choose to recover from which of the indemnifiers he
chooses. If he recovers his whole loss it is difficult to see upon what principle he retains a
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right to enforce his indemnity against the non-paying indemnifier. His loss has been satisfied.
There is no established principle that I am aware of that would entitle him to enforce his loss
from the contractor as there is in a case of a wrongdoer."
Accordingly Lord Caplan held that the only claim to survive was OPCAL's own claim in
respect of the uninsured "Oxy gap". There can be no doubt that this decision took insurers by
surprise, but on analysis it is not as outrageous as the response of certain insurers might
suggest. It is, however, in many respects a troubling case. This is not least because of the fact
that this issue did not emerge until very much the eleventh hour of the trial. It would seem
that the defence team argued that they were unaware that the claim was being brought by
underwriters exercising their rights of subrogation. That this emerged only during the course
of the trial and that they responded promptly once they learned of the fact. Frankly this does
not sound very credible. Surely it must have been clear to all that OPCAL were insured for
this loss.
Whatever the explanation it meant that an important and novel point was dealt with very
much as an afterthought. Lord Caplan did not even have the benefit of seeing the policies
under which OPCAL were insured so that he could consider any provisions that might of
been of relevance. The claimants were unable to put their house in order by bringing a claim
in insurers names as an alternative cause of action. It would seem likely that any such claim
is now time barred.
An appeal is almost inevitable. However until such time as the Court of Appeal give their
views there is one certain lesson for all insurers and their advisors. So all that can be said is
that one should be beware of the double indemnity.
In Osman Jamal & Sons Ltd. v. Gopal Purshottam,25 a company was acting as the
commission agents of the defendant firm and in that capacity bought certain goods for the
defendants which they failed to take. The supplier became entitled to recover from the
company certain sum of money as damages for breach. The company went into liquidation
before paying the claim.
It was held that the Official Liquidator could recover the amount even though the company
had not actually paid the vendor. This is where the double indemnity clause came into
25 1928 ILR 56 Cal 262
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prominence and it is because of this that the court directed that the amount should be set apart
so that it is used in full payment of the vendor in respect of whose contract the company had
incurred liability.26
The case of Manning v. AIG Europe (UK) Ltd.27 was brought by the liquidator in the
aftermaths of the collapse and liquidation of the Save group of petrol retailers. The parent
company, Save Group plc, bought petrol and sold it on to a subsidiary company, Save Service
Stations Ltd which owned 400 petrol stations. The group also loaned money to the stations,
creating substantial inter-company debts.
In 1997, Save provided a bond to Customs & Excise which deferred payment of VAT due on
the petrol. This bond was entered into on the group's behalf by a third party, AIG Europe, on
the condition that Save would indemnify AIG for various losses in certain circumstances. The
deed of indemnity also contained a subordinated debt clause.
When the Save group subsequently entered liquidation AIG argued that the subordinated debt
clause gave precedence to their 10 million debt over the 165 million inter-company debts.
Given that the entire assets of Save amounted to 54.5 million, the issue of where the debts
ranked was of critical importance to AIG, Save and other creditors.
The court confirmed the pre-eminence of the 'pari passu' principle in insolvency, which
required that that all debts are to be treated equally, but it added that a creditors' rights could
be subordinated to that of another by contract.
However, the group's liquidators argued that the indemnity was not a true subordinated debt
but a priorities agreement between certain creditors, such that those not party to the contract
should not be prejudiced by it. They argued that the indemnity infringed the 'pari passu'
principle by effectively removing a major asset of the group to the detriment of its creditors.
Mr. Justice Lloyd agreed but he said in legal terms the indemnity does not involve the
diversion of an asset of Group, but rather its suppression by subordination. He continued:
The fact that Group will not be able to collect in its main asset, namely the inter-company
debt, does not interfere with the [pari passu] principle.
26 Followed in Prafulla Kumar v. Gopi Ballabh AIR 1964 Cal 159
27 [2004] EWHC 1760 (Ch)
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Looking at the issues more broadly the judge concluded: while the [indemnity] is
disadvantageous to Group in present circumstances, the disability which it imposes [] as
regards the inter-company debt is, as it were, part of the price for the advantage secured []
through obtaining the assistance of AIG in getting the payment of duty deferred.

CONCLUSION

It is hereby submitted that the concept of fairness and equality of bargaining cannot be
excluded when talking about double indemnity clauses in indemnity contracts. Some basic
terms and conditions will always be there, whether they be outlawed by the provisions of
rules or statutes. What is needed in the complex world of today is a valid legislation with
regard to indemnity clauses and as such some provisions to protect the weaker sections in a
bargaining transaction.
It is now realised that economic equality often does not exist in any real sense and that
individual interests have to be made to sub serve those of the community. Hence there have
been fundamental changes both in our social outlook and in the policy of the Legislature
towards contract and the law today interferes at numerous points with the freedom of the
parties to make whatever contract they like. Obviously the draftsman of an indemnity clause
needs to approach the matter in much the same way as he would an exemption clause: the
wording must be as tight as possible, in other words watertight. Although there is a
reasonably strong line of authority for the courts not to approach an indemnity clause in the
same light as exemption clauses, the idea that is to be aimed at is tight wording coupled with
an indication in the clause that its function is the apportionment of insurance risks or that it is
otherwise reasonable.
Therefore acting within the limitations imposed on them by the contractual framework of
these transactions, the courts nevertheless endeavoured to alleviate the position of the
recipient of the document by requiring certain standards of notice in respect of the onerous

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clauses, and by construing the document wherever possible in his favour. Hope this piece of
research will add to the storehouse of knowledge for the future generations.

25

BIBLIOGRAPHY

Chitty on Contracts, Vol. 2, 209 (H.G. Beale ed., 28th edn., 1999)

Pollock & Mulla, Indian Contract and Specific Relief Acts (12 th ed.) Indian Contract
Act, 1872, LexisNexis Butterworths, Gurgaon, 2006Miriam-Websters Dictionary of
Law (1996)

John N. Adams and Roger Brownsword, Double IndemnityContractual Indemnity

Clauses Revisited, J.B. L 146 (1988)

Recent Developments in Double Indemnity Law, Kelly, John G. 33 Cornell L. Q. 360

(1947-1948)

John Adams and Roger Brownsword, Contractual Indemnity Clauses, J.B.L 200
(1982)

http://westlaw.com/

http://www.indiankanoon.org/
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ust_21_2000/indemnity_clauses.htm
http://www.legalmart.com.au/topics/business/it_ecom/true_story_1.asp
http://www.nmmlaw.com/articles/contr_indem.html
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eman/archive/2011/09/06/subrogation-new-appleman-on-insurance-law-library-editionchapter-49.aspx

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