Beware Hold Harmless and Indemnification Provisions

It pays to read and understand the contract you sign

Contractors often enter into contracts with third parties such as project owners, subcontractors, equipment lessors, landlords, municipalitiesconstruction contract-2s, etc. that include hold harmless and indemnification provisions. Such a provision requires that the contractor assumes liability that would ordinarily belong to the other party. If the other party is in a position of power over the contractor, it is not uncommon for the terms of the hold harmless/indemnification to be extremely burdensome.

The result can be that the contractor’s General Liability policy may not cover all of the liability assumed by the contractor resulting in significant out-of-pocket expenses or bankruptcy.

Most contractor General Liability policies include a coverage called contractual liability that covers certain assumptions of contractual liability. However, the contractual liability coverage under a General Liability policy is still subject to the same coverage limitations as regular negligence-based claims. For example, a General Liability policy covers bodily injury and property damage liability caused by an occurrence which is not subject to the standard policy exclusions. The same limitations apply to coverage under any contractual assumption of liability.

This is a complex area with which many attorneys and insurance agents struggle. The problem is that attorneys often don’t understand insurance coverages and insurance agents don’t understand contract law. As a result, it is best to consult with both parties before entering into a contract with a hold harmless/indemnification provision.

The Independent Insurance Agents & Brokers Association recently published an excellent article that illustrates this point with an example of a common provision that is totally one-sided and requires a contractor to assume much more liability than is covered under a General Liability policy. In the illustration, the following requirements go way too far:

  • The contractor is required to assume the liability of not just the project owner, but also any other parties that the project owner is required to defend under contract. This is an extremely broad assumption as the contractor would have no way of knowing all the parties with which the project owner is under contract.
  • The contractor is required to assume the liability of not just the project owner, but also its agents, servants, and employees. The use of the term “agent” expands the scope to any party that is hired by the building owner.
  • The contractor is required to assume any liability. The term “any” takes the assumption way beyond the normal bodily injury and property damage that is covered under a General Liability policy. “Any” would also include claims for breach of contract, breach of warranty, violation of intellectual property rights, and many other types of claims not covered under General Liability.
  • The contractor is required to assume liability that is caused by, arising out of, resulting from, or occurring in connection with the work that is being performed. This goes way beyond accidents or mishaps that are directly caused by the negligence of the contractor and brings into the scope of the assumption anything that is even remotely related to the job.
  • The contractor is required to assume liability caused by not only the negligence of the contractor in whole or in part, but also by the sole negligence of the project owner. Assuming the sole negligence of the other party means that the contractor is responsible for damages even if they are 0% at fault and the project owner is 100% at fault. This type of assumption in a construction contract is contrary to many states laws.

We offer all of our clients a contract-review service that includes advice on the fairness of indemnification/hold harmless provisions and how to effectively negotiate away unfavorable provisions.

Source:  “Hold Harmless Agreements Aren’t Harmless,” VU Faculty; Independent Agent; July 2013.
Posted By: