Tuesday, June 5, 2012

Hold Harmless – What is the impact of a hold harmless?

Frequently indemnifications have three requirements, 1) defend 2) indemnify and 3) hold-harmless. What is the impact of agreeing to hold the other party harmless?

The first impact is if there is any negligence that gives rise to a third party claim, by agreeing to hold the other party harmless, what you are doing is agreeing to be the only party that will be liable to the third party if there is joint negligence. What this also mean is since you have given up the right to make a claim against the party that you agreed to hold harmless, and as such your insurance company would not have any subrogation rights against that party. In some instances agreeing to a hold harmless without getting a contractual endorsement by the insurance company could also void your Commercial General Liability insurance or other insurances that protect against third party claims. This would leave you (if the contract was written individually) or your company to pay any damages that are awarded to the third party. In asking you to provide a hold harmless what a company is really doing is asking you to insure them against what could be their partial negligence in the injury or damage rather than have the comparative negligence (amount attributable to each party) be determined by a court.

A second impact is you (if the contract was written individually) or your company are effectively giving up a right to sue that party if they were partially negligent in an injury caused to you, an employee, or damage to your property. You could be 1% at fault, and the other party could be 99% at fault, and with a hold harmless you would have 100% of the responsibility. Without a hold harmless, the courts would determine both the damages to be paid and the percentage of those damages that each party has responsibility to pay. In that case you might be found to be only 1% liable.

A factor that can impact the amount that you have to pay is what party was sued by the injured party?
There are three scenarios. 1) Injured party sues you and you enjoin the other party in the suit. 2) Injured party sues the other party and they enjoin you. 3) Injured party sues both parties. In the first scenario you would have to pay the damages and then collect amount determined from the other party, which means if you were unable to collect their portion of the damage awarded you would wind up paying all the damages. In the second scenario the other party would have to pay the damages and then collect amount determined that was applicable to you. In the third scenario the suit would most likely claim that both parties were jointly and severally liable. What this means is that either party could be liable to pay the full amount of the damages if the other party was unable to pay. In injury lawsuits the vast majority of suits will be brought against all possible parties that could be negligent, looking to involve companies that have “deep pockets” who have the funds and insurances that can pay if others can’t.

Can you agree to hold the other party harmless as part of an indemnity? My opinion is that if you limited the hold harmless strictly to damages or injuries caused by your sole negligence and not be assuming liability for the other party’s negligence that is something you could provide. It’s probably something insurance companies could support (although it’s always best to check with them). Where insurance companies have significant concerns is when you are assuming liability for negligent actions of another party and they do not have the right to make a claim against that party because you contractually held the other party harmless. They wrote the insurance policy and established the rates based upon the risks with your company, not others.