The Hold Harmless (Indemnity) Clause of a contract is like the lifeboats on a cruise ship -- they just hang around until disaster strikes, and you hope they still work. Periodic review keeps them from becoming obsolete or worse. Indemnity simply means reimbursement, restitution, or compensation. Typically the indemnity provision applies in a three-way situation where a non-party suffers a loss or injury, whether damage to property or bodily harm or death, that arises from or relates to a contract between two other parties, wherein one party (called Party B) agrees to indemnify the other party (called Party A). You, as the party claiming the benefit of the indemnity agreement, will be Party A. The contract may be with a contractor for services including construction, renovation or repair, maintenance, management, cleaning or leases, to name a few, or may be with a supplier of goods such as inventory, machinery, equipment, or parts for manufactured products. Anyone who negotiates, prepares, or reviews such agreement should be aware of these finer points:
The agreement should include Party B’s obligation to defend, as well as to indemnify, Party A. The law recognizes a distinction between defense and indemnity, and a bare indemnity agreement does not require a defense (or payment of Party A’s attorney’s fees) against a claim. A suggestion: “Party B shall defend, indemnify, and hold harmless Party A....” If it is necessary for Party A to sue Party B for failing to defend or indemnify it, then the agreement should also provide for Party A to recover its attorney’s fees from Party B for such enforcement action.
A party may be indemnified for its own negligence, provided that the indemnity agreement expressly says that it covers the negligence by using the word “negligence” or similar language in the agreement.
Public Policy Considerations
Many states, however, have statutes that prohibit attempts to indemnify Party A from the consequences of his or her “sole negligence” in certain types of agreements, including those relating to the construction, alteration, repair, or maintenance of a building structure. Construction and renovation contracts and those for design services fall within this prohibition, but other agreements, such as real estate leases, property management or maintenance agreements, and others relating to the services for a building or real estate, may fall within the prohibition. To prevent an indemnity clause from becoming unenforceable under these statutes, a prudent person will include a disclaimer to the effect that nothing in the agreement should be construed to require Party B to indemnify Party A from the latter’s own, sole negligence.
Even the tightest indemnity clause is only as good as the ability of Party B to honor it financially. Many general liability insurance policies may not provide coverage for “liability assumed by contract,” e.g., indemnity agreements. Coverage in the policies, however, can be obtained within an endorsement adding coverage for Party B’s defense and indemnity obligations, either by expressly referring to the indemnity agreement or on a blanket basis. You should verify that the other party has contractual liability coverage in its liability insurance policy, in addition to any other insurance coverages required by your agreement.
Indemnity agreements are often disfavored by the parties and even the courts due to their perception as being unfair. To alleviate or mitigate objection, you may consider making the indemnity proportional. For example, that Party B’s obligation to indemnify Party A is limited to Party B’s degree of fault or responsibility for the loss or injury. Parties are generally more willing to sign a proportional agreement. This concept is fairer, but it defeats the purpose of placing the burden of the loss entirely upon the other party. Nevertheless, a potential indemnity is to be preferred to no indemnity agreement at all.
This is Part I of a series of articles addressing contract terms to protect your organization. Look next month for Part II on additional insured agreements. Bart Gary is the author of the recently published Georgia Construction Law Handbook. For more information concerning this article or the Georgia Construction Law Handbook, contact Mr. Gary at 770.818.1403 or [email protected].