Hold harmless and indemnification agreements are becoming increasingly important in business contracts. They are elements or clauses within a contract or agreement that can work to your business’s advantage, or they can just as easily work against your business. Hold harmless and indemnification are terms that are used interchangeably, but do not necessarily mean the same thing. As with many things, the devil is in the details — or in this case, the wording.
The Dangers of a Hold Harmless or Indemnification Agreement
When properly written, the intent of a hold harmless or indemnification agreement is to impose on one party the responsibility to pay all liability, damages, costs, expenses, and even attorney’s fees for the other party to the agreement. Even if it wasn’t your fault and the other party was at fault, you may still be obligated to pay damages.
Consider this scenario: A snowplow contractor is hired to plow a parking lot and salt the sidewalks. In this example, the snowplow contractor produces what they call a “standard contract” with plow time and frequency. Both parties sign the agreement. Two months later, the snowplow hits a parked car while plowing the parking lot and causes $5,000 in damage. The irate car owner wants someone to pay for their car damage, a rental car, and lost wages from work. When the claim is sent to the snowplow contractor with the expectation that they will pay for the damage they caused, they refer to the signed contract which included a hold harmless and indemnification agreement that obligated the parking lot owner to pay for any damage done by the plow driver.
Too farfetched? Won’t happen? Did you read the contract before you signed it? All of it? Did you understand what you read? Did you have your legal counsel review it before you signed it? All too often, business owners sign contracts only to find out later that they are obligated to pay for costs that they were not aware of. Alternatively, they hire a service provider, technician, or contractor without a written contract, only to find out after a loss occurs that the contractor has no insurance or assets.
What Should a Business Owner Do?
Consider the following tips before signing any contract:
- Don’t sign it without reading it — all of it. This point cannot be emphasized enough.
- A qualified legal review of all contracts is essential. Even if a contract has been previously reviewed, do it again. Liability law can and will evolve over time.
- Contact legal counsel if the contract appears to contain any form of a hold harmless or indemnification agreement, clause, or section, or if those words are used.
- If legal counsel has objections to the contract language but you still want to sign the agreement, make sure you understand the consequences and your obligations if a loss were to occur. This often occurs when you are a subcontractor to another larger contractor. You should only be liable for what you do, not for what others do or control. Ask your legal counsel for alternative contract language that would be more favorable to you and ask the contractor if they will accept a modified agreement.
- Actively seek legal advice and direction on contracts you are asked to sign. While there will be fees for this service, it will be considerably less than the litigation costs, property damage or bodily injury costs that a business could be obligated to pay if a claim occurs.
Looking for more information on using contracts to protect your business, including certificates of insurance, liability limits and the benefits of hold harmless and indemnification? Don’t miss this whitepaper:
- Using Contracts to Protect Your Business: Certificates of Insurance, Hold Harmless and Indemnification Agreements
Business contracts are a complex subject. Always consult with your insurance agent and legal counsel, and even your insurance carrier, before entering into any contractual agreements.