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| RISK CONTROL BULLETIN |
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| An Introduction to Hold Harmless Agreements |
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What are Hold Harmless Agreements?
Also known as an indemnity agreement, a hold harmless agreement or clause is a contractual device used to transfer risk from one party to another. One party, known as the indemnitor, assumes liability and holds the other party, the indemnitee, harmless from the liabilities associated with the hazards of a particular business venture.
This transfer of risk does not depend in any way on the existence of insurance coverage. If a hold harmless agreement is enforceable, the indemnitor must be prepared to respond to its obligation to indemnify, whether or not insurance exists to cover it.
However, we must understand that the agreement does not actually relieve the indemnitee of liability to an injured third party. If the indemnitor does not have the financial ability to meet its obligation under the terms of the agreement, the indemnitee will be required to pay damages.
To help assure that an indemnitor has the financial resources to meet its obligations, contracts should include provisions requiring him to purchase liability insurance with per project limits at least equal to those in the indemnitee's liability policy. The indemnitee may also want to be named, by endorsement, as an additional insured, on the indemnitor's policy, which will also entitle them to legal defense.
Are there different types of Hold Harmless agreements?
There are three main categories of hold harmless agreements as follows:
1. Broad Form Indemnification Agreement
Under a broad form hold harmless agreement, the indemnitor holds the indemnitee harmless for all liability pertaining to the subject matter of the agreement, even if the damage, injury or claim is due to the indemnitee's sole negligence. Following is an example of a Broad Form hold harmless clause:
"Contractor assumes and agrees to hold harmless, indemnify, protect and defend Owner against any and all liability for injuries and damages to Contractor himself and to Contractor's employees, agents, subcontractors and guests, third parties or otherwise, incident to or resulting from any and all operations performed by Contractor under any terms of this contract."
The phrases "any and all liability" and "incident to or resulting from any and all operations" serve to transfer liability from the owner to the contractor regardless of fault or negligence by the owner. It's also important to realize that the language serves to pick up substantially more liability than is covered under the terms and conditions of a standard comprehensive general liability policy.
A broad form hold harmless agreement would likely be void and unenforceable in some states such as Florida, Georgia, and Mississippi where anti indemnity laws do not allow them in construction agreements when there is any negligence on the indemnitee's part.
2. Intermediate Form Indemnification Agreement
Under an intermediate form hold harmless agreement the indemnitor holds the indemnitee harmless for all liability pertaining to the subject matter of the agreement except for any damage, injury or claim that is caused by the indemnitee's sole negligence. This means that if the indemnitor is at fault to any extent it will be obligated to hold the indemnitee harmless for 100 percent of the damages. Following is an example of an Intermediate Form hold harmless clause:
"For and in consideration of 2% of this contract, the Subcontractor, to the fullest extent permitted by law, shall indemnify and hold the Contractor and the Owner, their officers, directors, shareholders, partners, employees, agents or servants, harmless from and against any and all claims, damages, losses and expenses, including but not limited to attorney's fees, arising out of or resulting from the performance of the Work, provided that any such claim, damage, or loss or expense (i) is attributable to bodily injury, sickness, disease or death, or to injury or destruction of tangible property (other than the Work itself) including the loss of use resulting therefrom and (ii) is caused in whole or in part by any negligent acts or omissions of the Subcontractor, the Subcontractor's Sub-contractors, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder. The Subcontractor's duty under this provision is limited to a total of ONE MILLION AND NO/100 ($1,000,000) DOLLARS for all damages, including costs and attorney's fees for any single claim or suit."
The underlined language shows that the indemnitor will be required to hold the indemnitee harmless even in those situations when a claim, loss or damage is caused in part by the indemnitee. It does not say "...in whole or in part" which is why this is not a broad form hold harmless agreement.
3. Limited Form Indemnification Agreement
Under a limited form hold harmless agreement, also known as a Comparative Fault Indemnification Agreement, the indemnitor is only obligated to the extent of its own fault. Following is an example of a Limited Form hold harmless clause:
"For and in consideration of 2% of this contract, to the fullest extent permitted by law, Contractor shall indemnify and hold harmless Owner from and against claims, damages, losses and expenses, including but not limited to attorney's fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury or destruction of tangible property (other than the work itself) including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of Contractor. The Contractor's duty under this provision is limited to a total of ONE MILLION AND NO/100 ($1,000,000) DOLLARS for all damages, including costs and attorney's fees for any single claim or suit."
Under a limited form hold harmless agreement, also known as a Comparative Fault Indemnification Agreement, indemnitor is obligated only for its own negligent acts or omissions and is not assuming any liability for another's negligent acts or omissions.
However even this limited form hold harmless agreement may increase the indemnitor's liability by altering the common law obligations between the parties to the contract. Because of this before holding anyone harmless using even a limited form hold harmless agreement, legal advice should be obtained to insure that the language chosen reflects your intent.
What criteria are used to determine if hold harmless agreements are enforceable?
First, you must determine if the state you are operating in has any anti-indemnity statutes. Alabama does not but other states such as Florida, Georgia and Mississippi do have anti-indemnity statutes pertaining to construction agreements. Florida, Georgia and Mississippi do not allow a Broad Form hold harmless in construction contracts. Georgia allows the Intermediate Form. All three allow the Limited Form. Also be aware of any specific contract language requirements that must be met, even when hold harmless agreements are allowed under state law. For example Florida Statute Section 725.06, will allow Limited Form hold harmless agreements providing the contract or bid specs include a provision that either limits (places a cap on) the indemnitor's liability or, provides consideration to the indemnitor for assuming liability.
To the extent that hold harmless agreements are allowed, there are some basic requirements a court will look for when determining if a specific hold harmless agreement will be will be enforced. Typically the:
• Liability must arise out of the subject matter of the clause i.e. the work or operations that
the contract pertains to
• Language should be clear and unequivocal (i.e. sufficiently clear or definite)
• Agreement cannot be "against public policy" (i.e. not contrary to the public interest)
• Agreement must otherwise not be prohibited by statute and meet any specific requirements
(such as Florida Statute Section 725.06)
How can I be sure that the contracts I sign with my subcontractors or my customers contain hold harmless agreements that are in my best interest?
• Whenever possible use contracts that are written or approved by your legal counsel,
preferably one knowledgeable in contract law.
• Have your legal counsel review and approve all changes in contract language.
• When your legal counsel is writing a contract for you, suggest they begin with industry
standard agreements such as those available through The American Institute of Architects.
Where can I learn more about contractual risk transfer practices?
• An Introduction to Certificates of Insurance, FCCI Insurance Group Risk Control Bulletin
• An Introduction to Additional Insured Status, FCCI Insurance Group Risk Control Bulletin
• Construction Risk Management, Volumes I & II, Pub. International Risk Management
Institute (IRMI) 972-960-7693
• Contractual Risk Transfer, Volumes I & II, Pub. IRMI
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