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Indemnity and Hold Harmless – Now What?

January 20, 2015

Presented by: Michelle Lounsbery, J.D., MBA

ACQUISITION COMPANY NAME • MARSH & McLENNAN AGENCY, LLCHowalt+McDowell Insurance, a Marsh & McLennan Agency

OBJECTIVES:

• What is indemnification

• Different levels of indemnification

• Scope of indemnification

• Other obligations found in indemnification provisions

• Overbroad language

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What is an Indemnification Agreement?

• Indemnity is the obligation resting on one party (Indemnitor) to make good a loss or damage incurred by another party (Indemnitee).– Subcontractor agreeing to indemnify the Contractor for the Subs

negligence or for those who the sub is liable.

Parties – Indemnitor and Indemnitee

• General Rule: Each party is liable for its own negligent conducts• Indemnity provisions are risk shifting mechanisms that shift liability to

another party.

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Different levels of indemnification• Narrow, Intermediate, Broad

• Narrow – General Rule – I take my negligence, you take your negligence

• Intermediate – I’m going to take mine, plus yours if you are not solely negligent

• Broad – I’m taking everything, even if you are solely negligent

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Scope of Indemnification• The obligation to indemnify does not occur until the end of a case or other

resolution, when indemnitee has had a judgment entered against it for damages, or has made payments or suffered actual loss.

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Other Obligations found within Indemnification provision

• 1) Defense

• 2) Hold Harmless

• 3) Insurance Role

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Defense• In most jurisdictions: Any duty to defend is independent of the duty to

indemnify

• Must immediately and actively defend or fund the defense of any claim at the outset. The contractual duty to defund thus arises first in time before the duty to indemnify

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Difference between Indemnification and Hold Harmless

• Strictly speaking, a “hold harmless” clause is not an indemnification provision per se, although courts have tended to use the terms interchangeably.

• A contractual provision that only states that A will “hold B Harmless” from claims based on A’s negligence may not indemnify B from third party claims or provide a duty of defense under these terms. Under this approach, the “hold harmless” language only releases B from liability to A with respect to claims covered by the clause.

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Additional Insured Issue• In a majority of states, the statutes allow for a lower tier contracting party to

purchase insurance that would cover that party from their own negligence or partial negligence.

• This is separate from the indemnification provision.

• Subcontractor could indemnify the Contractor for their partial negligence within the indemnification agreement, allowed under most anti-indemnity statutes, but then under the additional insured requirement of the contact be forced to pick up the full negligence of the Contractor.

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Overbroad Language – Be Aware!• “Any Act or Omission”

• “Any Intentional Acts”

• “Any liability”

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• Claims or damages versus Liabilities• Claims or damages are considered different from an indemnity for

liabilities

• In general an indemnity for damages – demands- costs – losses is not payable by the indemnitor until the indemnitee suffers actual loss by being compelled to pay the claim or damages.

• An indemnity for “liabilities” is considered broader and requires the indemnitor to pay when the liability of the indemnitee has become “fixed and established.” No payment of any claims or suffering of actual damages is required.

“All claims, actions, suits, demands, damages, liabilities, obligations, losses”

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Best Practices• Since the terms “indemnify”, “hold harmless”, and “defend”, have distinct and

separate meanings, consider using them individually in order to incorporate all three concepts and avoid ambiguities in other references to indemnification obligations in the contract.

For Example: Each party agrees to fully indemnify, hold harmless and defend…..

• If you are an A/E firm, please note that this is not the best practice for you!

• Make sure the indemnification provision clearly articulates what you are expecting to do. If not, provide additional language/modify the language to clearly state when and for what you are providing that indemnification. – For example: Nothing within this indemnification provision shall obligate the

subcontractor to indemnify, defend, or hold the contractor harmless from their sole negligence.

• Make sure to include “liabilities” in the indemnification clause to maximize the scope of the protection

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Legal/regional regulatory statement to be added here if required.

This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Howalt+McDowell Insurance, a Marsh & McLennan

Agency LLC Company shall have no obligation to update this document and shall have no liability to you or any other party arising out of this document or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affected if any underlying assumptions, conditions, information or factors are inaccurate or incomplete

or should change.

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