While every business faces risks that can lead to business insurance claims or lawsuits, there are ways to protect yourself by making sure another party assumes the risk. Hold harmless agreements are a way to prevent you or your company from being held liable for property damage, financial loss or bodily injury that occurs during a working relationship.
Here’s what you need to know about hold harmless clauses and how they can minimize your chances of becoming part of litigation.
A hold harmless agreement protects a business from claims or lawsuits. These insurance clauses are often used in businesses where the main company providing a service wants a secondary party to assume the risk of property damage, financial loss or bodily injury.
A hold harmless agreement is often used in service industries where there are subcontractors involved. For example, say you’re a wedding planner hiring a caterer. You’d want the caterer to be responsible for their own liabilities, and you’d have them sign a hold harmless agreement releasing you of responsibility.
Other times, a hold harmless agreement is used when a service provider offers high-risk activities. For example, a scuba diving company will have all clients sign a hold harmless agreement stating that they understand the activity’s risks and won’t hold the company responsible for losses or injury.
A hold harmless agreement is also called a “release of liability” or a “waiver of liability.” It can be reciprocal or unilateral. A reciprocal hold harmless agreement says neither party will hold the other party responsible for losses. A unilateral hold harmless agreement protects only one party.
The terms “indemnity” and “hold harmless” are often confused. Indemnity is designed to make one whole after a loss, while hold harmless clauses aim to release loss liability.
In other words, an indemnity clause says that if there’s a loss, you’ll be paid for the amount of the loss, thus being made whole. A hold harmless clause or agreement says you’re not responsible for another party’s losses.
For example, if you’re a general contractor who hires subcontractors, you may have both a hold harmless clause and an indemnity clause in your contract. The indemnity clause will come into play if the subcontractor causes property or financial loss to you or the client. The hold harmless agreement would be in place to prevent the subcontractor from seeking damages if they’re harmed or have property damaged during the course of working with you.
Contractors’ business insurance needs are complex, with two types of general liability insurance: claims-made policies and occurrence policies.
Many companies benefit from using a hold harmless agreement. It’s about managing risk; if you want to transfer risk to another party, you can use a hold harmless agreement.
These are some situations where a hold harmless agreement could come into play:
There are three types of hold harmless agreements:
|Type||What it protects|
|Broad form||It transfers all risk to the subcontractor being insured. The subcontractor assumes responsibility for accidents, their own negligence, general contractor negligence and any combined negligence. Broad form may be prohibited in some jurisdictions.|
|Intermediate form||It puts all subcontractor or participant activities and risks on the subcontractor or participant. It does not transfer general contractor risk or a service provider’s negligence or accidents.|
|Limited form||This is a very narrow form that specifies the exact liabilities based on responsibilities. It divides the risk proportionally.|
Work with an attorney to develop the correct type of hold harmless agreement with the right conditions in place for protection. When it comes to risk mitigation, you want the job done right.
Using a hold harmless agreement in business has several benefits.
There are many templates online that can help you draft a hold harmless agreement. Keep in mind that drafting it incorrectly could leave you with liability, so you should confirm with an attorney that the hold harmless agreement does what you intend it to do.
A hold harmless agreement includes the following.
A hold harmless agreement and a waiver of subrogation are similar, but there are distinct differences.
Subrogation is what an insurance company does after paying a claim to recoup losses from the responsible party. For example, say you were in an auto accident that isn’t your fault, but the other party refuses to take responsibility. Your insurance carrier will pay the claim so you don’t have to pay for damages. Then the insurance carrier will subrogate, meaning it will sue either the responsible party or their insurance carrier to recoup the money.
When there’s a waiver of subrogation, the party waiving its right to subrogation says its insurance company won’t go after the responsible party to recoup losses. Waivers of subrogation are common in construction contracts, where subcontractors are hired and the general contractor doesn’t want another insurance company to try to recoup losses from a claim.
A hold harmless agreement differs in that it shifts liability. While a waiver of subrogation is protection from liability, it doesn’t shift the liability as a hold harmless agreement does.
A hold harmless agreement isn’t airtight. You can still be held responsible for instances of negligence, coercion and illegal activities.
Not having a hold harmless agreement can undoubtedly affect whether or not your business is eligible for certain types of business insurance. Many insurance carriers don’t want to insure a company offering high-risk activities if they don’t get a signed waiver that shifts the liability to the participants.
But having a hold harmless agreement could also create certain insurance problems. With the hold harmless agreement in place, after someone files a claim, the insurance company may reject it based on the waiver of liability. With the insurance claim denied, the harmed party could then sue the business for the losses.
Whether or not the hold harmless agreement would hold up in court depends on how it was written and how narrowly the transfer of liability is defined. If a court doesn’t uphold it, your business could be held liable for the loss. With the insurance claim denied, you could be paying a judgment out of pocket.