Hold Harmless, Indemnification Agreements: Critical to All Vendor Contracts

Over the years, MCIT claims staff have investigated several member liability claims where a third-party vendor was at least partially if not fully liable, but a review of the contractual agreement between the member and the contractor showed a lack of a hold harmless and indemnification clause or a poorly worded one. This significantly hinders the ability for MCIT to tender the claim to the liable third party or to protect members.

Hold harmless and indemnification is a clause that should identify which party will defend and indemnify the other party in a claim situation; it may be a mutual agreement.

Hold Harmless and Indemnification

An important part of the risk management process is placing the responsibility (including attorney fees and damages) for negligent actions with the negligent party. It is important that the wording of the hold harmless and indemnification clause of the contract be clear.

Agreements with vendors usually include statements confirming that they accept responsibility for their negligent acts by agreeing to hold the member harmless in the event of a claim. The hold harmless and indemnification clause can protect the member from costs and damages arising out of the negligent acts of the vendor. To ensure that the vendor also pays for all attorney fees, the provision should read “defend and indemnify.”

In its simplest form, indemnity means that the vendor will compensate the member for any damages the member incurred as a result of the member being brought into a claim arising from the vendor’s negligent actions. Or it may be a circumstance that the member will be asked to hold a vendor harmless and be responsible for defense costs and damages due to the member’s negligent acts.

Members can benefit by including a hold harmless and indemnification provision favorable to the member. The vendor should hold the member harmless from any claims, suits, costs or damages as a result of the vendor’s negligence. The hold harmless provision can cover any type of expense, including but not limited to legal fees, professional fees, judgments and settlements.

Legal fees for even a small lawsuit can reach into the hundreds of thousands of dollars before a settlement is reached. This is the reason it is important to have defense included. Otherwise, members can be responsible for the cost.

Sample Hold Harmless, Indemnification Clause

Following is sample language that should be tailored to fit each individual situation.

The vendor agrees to defend, indemnify and hold [member name], its employees and officials harmless from any claims, demands, actions or causes of action, including reasonable attorney fees and expenses arising out of any act or omission on the part of the vendor, or its subcontractors, partners or independent contractors or any of their agents or employees in the performance of or with relation to any of the work or services to be performed or furnished by the vendor or the subcontractors, partners or independent contractors or any of their agents or employees under the agreement.

Waiver of Subrogation

A similar issue is when some parties ask members to include a waiver of subrogation in the agreement. This may not be in the members’ best interest. Subrogation is the right to recover the amount of a loss from the one legally liable for the loss.

If a member agrees to waive subrogation, it could prevent MCIT or the member from recovering damages from a negligent party after a loss. Such recoveries are important for members because of their out-of-pocket expenses and as adverse losses affect both rates and dividends. Therefore, MCIT asks members not to jeopardize their right of subrogation and request that the waiver of subrogation wording be deleted from agreements.

Example of Waiver of Subrogation

Following is an example of waiver of subrogation wording from a railroad contract.

The policy must name Railroad as an additional insured and shall contain a waiver of subrogation provision against Railroad, and to be so written that the insurers shall have no claim or recourse of any kind whatsoever against Railroad or Railroad’s property.

Careful Consideration Is Key

Contracts can bring additional loss exposures to MCIT members, but they can be managed with careful consideration prior to finalizing agreements. MCIT recommends that members do not enter into contracts that have not been reviewed and approved by legal counsel or a designee that understands contractual risk management considerations.

Red Flags in Contracts provides additional information about contract risk management.

In addition, MCIT risk management consultants are available to review members’ proposed agreements from a risk management perspective and offer recommendations. Risk management consultants can be reached toll-free at 1.866.547.6516.