All about an indemnity period 

This article has been written by Mudit Gupta. This article discusses all the necessary details about the indemnity period and its implications for various types of agreements.

It has been published by Rachit Garg.

In a world that is constantly evolving and full of uncertainties, risks, and unexpected events, it becomes crucial to prioritise safeguarding our interests. Whether we are starting a business venture, pursuing our dream job, or simply going about our activities, we as humans face numerous risks that can result in unforeseen consequences. It is during these times that the importance of indemnity contracts becomes paramount. One crucial aspect considered during the negotiation of these contracts is the duration for which indemnity is provided to the party being protected.

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An indemnity contract is an agreement where one party assures the other party that they will cover any losses that may occur on an asset or any other matter for which indemnification is provided. This arrangement is commonly known as indemnification. Indemnification is granted for a period of time, and any losses occurring after that period are not covered. A familiar example where many of us have encountered agreements is through our insurance policies. Insurance involves one party, typically referred to as the insurer, promising to compensate another party, known as the insured, for any losses, damages, or liabilities covered by the policy. Thus, insurance can be seen as a form of indemnity. In this setup, the insurance company receives a payment, known as a premium, from the policyholder. Takes on the responsibility of covering any losses that may occur due to specific events mentioned in the policy.

In this article, we will be looking at all the important aspects of the indemnity period, including what an indemnity period is, how it works, its role in the insurance industry, business interruptions, and tax indemnity in cross-border transactions.

The case of Adamson v. Jarvis (1827) introduced the contract of indemnity for the first time. In this case, the defendant gave the plaintiff, who was an auctioneer, instructions to sell livestock, which were later discovered to be belonging to someone else. The owner died. After that, the plaintiff sued the defendant, who gave him the order to sell the livestock. The decision in this instance was given in favour of the plaintiff. According to the Court, the individual who gave the auctioneer instructions effectively indemnified the auctioneer, and hence, he was held accountable for the same under his indemnity liability.

As per Section 124 of the Indian Contract Act, 1872:

A contract of indemnity is a contract whereby one party, i.e., the indemnifier, promises to save the other party, i.e., the indemnified, from the loss caused to him by the conduct of the promisor or any other person.

A contract of indemnity is a contingent contract because it is the happening of a certain event by the indemnifier or a third party that triggers the contract. The occurring event triggers the contract and leads to the maturity of liability.

For a valid contract of indemnity, there are certain conditions-

  • The consideration for the contract must be lawful.
  • The object of the contract must be lawful. 
  • Loss to the indemnity holder is an essential requirement.
  • It is dependent on a particular event.
  • The indemnity may be expressed or implied, as per the situation.
  • All the other essentials of a valid contract.

These conditions need to be fulfilled for a valid contract of indemnity to take place. 

The indemnity period is the duration of time agreed is agreed-upon by the parties during which one party agrees to assume the risk and provide the other with indemnification. Most of the time, it is specified as a clause in the agreements and acts as a deadline for identifying and disclosing losses or damages. Once this time period gets over, the party seeking indemnity can experience difficulties as they might have to resort to dispute resolution mechanisms to recover for losses that were previously unknown to them while making the agreement.

How does the indemnity period work

Commencement

The commencement of the indemnity process is initiated by the agreement itself. The exact point at which the indemnification starts is typically specified in the indemnity agreement. This could be triggered by an occurrence, such as an accident or a natural calamity, or in accordance with agreed upon terms between both parties.

Duration

The duration of the indemnity period may differ based on the agreement or policy and the level of coverage offered. It can be restricted to a timeframe, like a year, or it could extend until certain requirements are fulfilled, such as the completion of a particular project. In a few exceptional cases, insurance is obtained to protect against incidents that happened prior to obtaining the policy; in fact, some policies might even have a start date that precedes their date.

Claim submission

If the indemnified party suffers a loss or damage covered by the agreement or policy during the indemnity term, they can file a claim with the party providing indemnification. The claim should follow the guidelines outlined in the agreement or policy. Include supporting documents and evidence.

Recompense

As per the terms and conditions outlined in the policy or agreement, the party responsible for indemnification will be required to provide compensation to the party being indemnified if their claim is approved. Typically, the agreed upon indemnity amount or the coverage limit specified in the policy is used to determine the loss incurred during the indemnity period and calculate the compensation.

Termination

The period of indemnification ends either after a specified duration or when certain predetermined conditions are met. For example, in a construction project the indemnification period concludes at the project’s completion and final approval. After the indemnity terminates, the party who has been protected may no longer be eligible to make claims, for losses that occurred thereafter.

Extension or renewal

The party being indemnified may choose to extend the indemnity agreement for an additional time or renew the agreement. But this scenario is completely dependent on the specific circumstances of the case. Both parties have to agree in order to extend the agreement.

In coverage claims, the period of indemnity plays a crucial role in establishing the time frame within which the insured party can obtain compensation for the covered loss. The most important factor that is taken into consideration when evaluating the financial effects of a loss and ensuring that the insured party receives sufficient reimbursement is the indemnity period. 

In order to make sure that the insured parties are reimbursed fairly for the financial impact of the covered losses, the indemnity period plays an essential role. The insured stakeholders can continue regular activities and recover financially from the losses experienced during this time because the indemnifier pays for ongoing expenses and loss of income. If the insured party’s recovery period is longer than the insurance term, they may also experience financial difficulties if the indemnity duration is not appropriate. 

Also, security is provided during the indemnification period against unforeseen setbacks or difficulties in the healing process. It provides an affordable timeframe for assessing and reconstructing the business, providing the insured party with a sense of security during a challenging period.

Indemnity period in fire insurance claims

The period during which the policyholder can request compensation for damages caused by a fire incident on their property or goods covered by the insurance policy is known as the indemnity period in fire insurance claims. This period typically begins from the day of the loss. Continues until the insured property is fully restored or repaired or until the maximum compensation limit is reached, whichever happens first. The purpose of this timeframe is to ensure that the insurance coverage remains valid and that policyholders receive proper compensation for their losses.

Indemnity period in life insurance claims

The time period following the insured person’s demise during which the policyholder’s beneficiaries may submit a claim is known as the indemnity period in life insurance. This time frame varies according to the provisions of the policy but normally lasts between one and two years. The insurer may reject a claim if it is not submitted within this time frame.

Indemnity period in commercial insurance policies

In the realm of commercial insurance policies, the concept of the indemnity period holds significance in determining the extent of coverage and compensation provided to those who are insured. The indemnity period in commercial insurance policy refers to the duration during which individuals have the right to receive compensation after experiencing a loss or event that falls under their insurance policy coverage, such as a fire, a natural disaster, or business interruption. Throughout this period, the insurance policy typically covers any loss of profits, additional expenses incurred, or reduction in business turnover as a result of the covered event. It is crucial for both policyholders and insurers to establish a mutually agreed upon indemnity period during negotiations and when drafting insurance policies since it directly impacts an insured individual’s ability to recover from unexpected disruptions and maintain their financial stability following a covered incident.

Indemnity period in auto insurance claims

The time frame in which an insured person is qualified to receive compensation for damages brought on by covered occurrences, such as accidents or theft, is known as the indemnity period in vehicle insurance claims. This time frame normally starts when the incident happens and lasts until the vehicle is fixed, replaced, or the policy limit is reached.

Indemnity period in home insurance claims

The indemnity period in home insurance refers to the time frame when homeowners can request compensation for any damage or loss to their property or belongings caused by covered events like fires, thefts, or natural disasters. This period starts from the date of the incident. It lasts for the duration mentioned in the insurance policy. It’s crucial for policyholders to carefully review and understand the indemnity period mentioned in their home insurance policies, as it directly affects their ability to file claims and receive reimbursement for any losses suffered. Having a coverage duration can leave homeowners exposed to expenses, so it’s important to choose an indemnity period that suits their individual needs and potential recovery timelines. Additionally, any extensions or changes to the indemnity period should be discussed with the insurer to ensure the protection of the property.

Indemnity period in marine insurance claims

The period of indemnity, in the context of marine insurance usually starts when the insured event occurs, like when the vessel leaves the port or begins its voyage. It lasts for a duration as mentioned in the insurance policy. It’s crucial for both insurers and insured parties to have an understanding and agreement about how this indemnity period will be since it directly affects the coverage provided by the policy. During this time the insured party can seek compensation for losses covered by their insurance policy following the terms conditions and limitations stated in their policy document. Therefore having a defined indemnity period is vital to ensure that the insured party receives financial protection if any marine related incidents occur. In India’s world of insurance seeking legal guidance and consultation might be necessary to interpret and negotiate the terms of this indemnity period in order to serve the best interests of all parties involved.

Indemnity period in context of business interruptions

When it comes to business interruption, the indemnity period refers to the timeframe within which a company can file a claim for losses incurred due to disruptions in operations. Various events like disasters, fires, equipment breakdowns, and other covered risks can cause disruptions, and insurance coverage is taken for them.

During the indemnity period, the company has two tasks. The first is to make claims with their insurance provider. The second is to explore alternative means of payment, such as contractual agreements, to cover additional expenses and lost revenue until things return to normal. Typically, this period starts from the date of the incident covered by the policy and continues until either the stated restoration period expires or the business resumes from its interruption condition.

The terms “indemnity period” and “period of insurance” are connected to each other. They have different meanings in insurance policies. The indemnity period represents the time frame during which the insured is compensated for losses, while the period of insurance refers to the duration that the insurance policy remains valid. The indemnity period is a subset of the period of insurance, and its length varies based on covered events and their duration. It is important to understand the difference between both these terms and use them accordingly.

In cross-border private equity and M&A deals, the issue of tax indemnity is one that cannot be overlooked. Tax liabilities can be substantial, and parties should ensure that they are protected against potential liabilities arising from the contract. Tax clauses are usually included in the agreement to provide that protection. These issues are among the most important issues negotiated in the negotiations of such deals. In such transactions, in the event of a business merger or acquisition, there may be a potential tax liability that may be pending or arising from the company’s past performance, and the party in control should be sufficiently indemnified against the same.

The main point of negotiation for a tax indemnity is the period of indemnity. In this regard, the period of indemnity basically means the time duration during which the indemnified party can raise a claim regarding the tax liability. The indemnifier tries to keep it as short as possible, and the indemnified party tries to negotiate a period that is a bit longer so that they can get a longer window of time during which they can raise a claim if any tax liability arises.

Indemnity clauses might remain in effect for a very long time. The Income-tax Act does not clearly impose a limitation period on procedures relating to withholding tax liabilities, despite the fact that a seven-year limitation period has been specified for revisiting prior tax cases.

What is a tax indemnity

A tax indemnity refers to the responsibility of compensating for any tax obligations that may arise in the future following the completion of a transaction. Parties often include tax indemnity clauses, in agreements to safeguard themselves against tax liabilities that could emerge due to the transaction or actions taken by the company prior to the agreement. This indemnity serves as an assurance that if any tax related issues arise, both parties will be protected from any resulting losses or damages. Such assurance provides a sense of reliability for the party being indemnified during the finalisation of the deal.

Why is tax indemnity important

Tax liabilities for cross-border transactions can have a complex and significant impact. A tax liability can put the transaction in jeopardy. Parties must ensure that they are adequately protected against any unexpected tax liabilities that may arise. Tax indemnity clauses can provide this protection by ensuring that any tax liabilities associated with the transaction are addressed by the indemnifying party.

Without tax indemnity, parties would be exposed to potential losses and liabilities from tax-related issues that may arise after the transaction. Tax indemnity clauses can provide a level of certainty and protection for the parties involved. This helps in maintaining the transparency between the parties who are stakeholders in the transaction.

The parties to a tax indemnity

In a private equity or M&A transaction, the parties to the transaction negotiating over tax indemnity are typically the buy side and the sell side. The indemnity is usually provided by the sell side to the buy side as a form of protection against any tax-related issues that may arise after the transaction. The buy side can claim the tax amount that was due before the completion of the transaction. 

Types of tax indemnities

When it comes to tax indemnity, it is generally a unilateral indemnification in which the party responsible for indemnification, the sell side, is obligated to assume all tax liabilities associated with the transaction, regardless of when they may arise. The indemnifying party must provide compensation for any losses or damages related to taxes that may occur, including interest and penalties. The purpose behind providing a tax liability indemnity is to ensure that the other party does not have to bear the weight of tax liabilities that arose before the deal was finalised, as it creates an undue disadvantage for the sell side in the deal. Indemnity provided for taxes in such transactions can broadly be divided into two parts, namely, full tax indemnity and limited tax indemnity. 

Full tax indemnity

The purpose of this indemnity is to make sure that the buy side is not held responsible for any unexpected tax obligations that may arise after the transaction is finished. Essentially, it gives the buy side a level of protection, allowing them to move forward with the M&A deal knowing that they won’t be burdened with tax liabilities that could potentially reduce the value of the acquisition. Full tax indemnity clauses are thus a part of M&A agreements in India because they help manage tax related risks and encourage transparency between all parties involved.

Limited tax indemnity

In a transaction, most of the time, the sell side provides guarantees to the buy side about the accuracy of the target company’s tax positions and statements. However, it’s important to note that these guarantees have limitations in terms of time and financial responsibility. Usually, there is an agreed upon timeframe during which the sell side is accountable for any tax related claims that arise after the deal is closed. Additionally, there is often a limit on the exposure of liability to tax risks, and sometimes it is capped at a predetermined amount. This limitation promotes transparency and fairness in M&A transactions by making sure both parties share the responsibility of tax liabilities in a controlled and manageable way, leading to negotiations and reducing uncertainties in the agreement.  

The period of indemnity and the waiting period are two terms that appear to be similar but are actually quite different. The period of indemnity in the context of an insurance policy is the total time duration for which the policy is valid, and the losses under that period are covered by the insurance. On the other hand, the waiting period is the time duration that starts after the loss has occurred and a request for claim recovery is put forth before the insurance provider. The exact beginning of the waiting period for an insurance claim may vary depending on the specifics of the policy documents, but it generally begins when the policy is created or when the loss is realised and the insurance company creates the customs. An example of this is property insurance, especially fire and flood insurance. In such cases, the waiting period begins on the date of the injury or loss.

It should be noted that some insurance policies include a waiting period before work can begin. The waiting period helps prevent fraudulent claims and assures that payments only begin after a certain amount of time has elapsed since the policy was initiated for the claim. It is important to check the insurance policy carefully to find out the exact time the payment period begins.

This provides important information and a better understanding of the coverage period. 

If a loss is realised after the expiration of the period of indemnity, serious concerns arise about the efficiency and reliability of claims. It is intended that, for a fixed term, the indemnity will provide a specified period within which the indemnified may report and submit losses. Indemnity contracts generally have clear terms and conditions regarding reporting requirements and deadlines for claims. Planners should review this information carefully to ensure they understand their responsibilities and rights. 

Failure to report a loss within the indemnity period may result in a claim being denied, leaving the individual or company solely liable for the financial consequences. Recognising losses after the coverage period has passed not only creates uncertainty but also reveals potential flaws in the contract of indemnity. 

Furthermore, this discrepancy reflects a potential disconnect between when the indemnifier becomes aware of the loss and when it is able to take appropriate action. This gap can be due to various factors, such as late discovery or a lack of knowledge about policy terms between the two. Because of these issues, parties should strive to be transparent in their negotiation of reporting requirements.

In the case of National Insurance Co. Ltd. vs. Sujir Ganesh Nayak & Co. & Anr. (1997), the Supreme Court held that, as per the forfeiture clause of the insurance policy, in case of rejection of the claim, the party had to file a suit within 12 months. The policyholder in this case filed the suit after 12 months. The Supreme Court rejected the suit, saying that it was barred by the limitation provided in the policy, which was agreed upon by the policyholder.

It is crucial for people and business owners in India to have an understanding of the concept of indemnity period. This particular time frame holds importance in insurance policies and other agreements as it provides security against unforeseen losses or damages.

Insurance policyholders should be knowledgeable about the triggers that determine payment terms, such as damage, interruptions in business operations, or other specified events.

Precise analysis and calculations of the duration of the indemnity period are vital for stakeholders to safeguard their interests and minimise losses. Seeking assistance from lawyers can greatly assist individuals and businesses in navigating through the complexities of this period. Legal experts can help interpret policy provisions, negotiate information, make informed decisions, and reduce any possible disputes between the parties involved.

  1. Can the indemnity period be extended after purchasing the policy?

In some cases, you can prolong the indemnity period once you’ve bought the insurance policy. However, it’s important to keep in mind that any extensions are subject to the terms and conditions specified in the policy. If the insured wants an extension of the policy, they should inform the insurer and be aware that there may be a cost involved.

  1. What are the most common trigger points for invoking a tax indemnity?

The discovery of unreported tax liabilities, errors or misrepresentations in tax representations and warranties, or modifications to tax regulations that have an impact on the transaction may all result in the need for a tax indemnity.

  1. What is the duration of the tax indemnity obligation?

The transaction contracts often establish the tax indemnity obligation’s duration, which might range from a set time frame to an indefinite duration.

  1. What is tax indemnity in the context of M&A transactions?

Tax indemnity refers to an agreement where one party agrees to compensate or indemnify the other party for any tax liabilities or losses that may arise from the transaction.



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