Critical to All Vendor Contracts
Date: September 2018
MCIT claims staff have recently investigated several member liability claims where a third party vendor was at least partially if not fully liable, but a review of the contractual agreements between the member and the contactor showed a lack of a hold harmless and indemnification agreement 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 the vendor also pays for all attorney fees, the provision should read “defend and indemnify.”
In its simplest form, indemnity means 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 membership’s 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 from recovering damages from a negligent party after a loss. Such recoveries are important for members, 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 by legal counsel or a designee that understands contractual risk management considerations.
Additional information about contract risk management is provided in “Red Flags in Contracts: Coverage, Exclusions and Risk Management” available at MCIT.org/resource/.
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.