What Is a Hold Harmless Agreement?

What is a hold harmless agreement?

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 subcontractors are involved. For example, let’s say you’re a wedding planner and you need to hire a caterer. If you want the caterer to be responsible for liabilities that result from their involvement in a wedding, you’d require them to sign a hold harmless agreement absolving you of any responsibility. 

Other times, a hold harmless agreement is used when a service provider offers high-risk activities. For example, a scuba diving company will require all clients to 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. 

Indemnity vs. hold harmless

The terms “indemnity” and “hold harmless” are often confused. Whereas a hold harmless clause aims to release loss liability, an indemnity clause is designed to make one whole after a loss. In other words, a hold harmless clause or agreement says you’re not responsible for another party’s losses; an indemnity clause says that if there’s a loss, you’ll be paid for the amount of the loss, thus being made whole.  

For example, if you’re a general contractor, you may have both a hold harmless clause and an indemnity clause in your agreements with your subcontractors. 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 prevent the subcontractor from seeking damages if they’re harmed or their property is damaged while they’re working with you. 

Hold harmless agreement vs. waiver of subrogation

A hold harmless agreement and a waiver of subrogation are similar, but there are key differences.

Subrogation is what an insurance company does after paying a claim to recoup losses from the responsible party. For example, let’s 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. 

Who needs a hold harmless agreement?

Many companies benefit from hold harmless agreements. It’s about managing risk; if you want to transfer risk to another party, you can use a hold harmless agreement. Here are some situations where a hold harmless agreement could come into play:

• Renting or leasing your property: Someone could host a party on your property, and you don’t want to be liable if someone gets hurt.
• Hiring subcontractors: You don’t want to be liable for their injuries or work accidents that lead to claims.
• Sponsoring an event: Events that involve risk, such as sporting events, should make sure participants assume the risk of participating in those events. 
• Starting a business venture: When partnering with another person or company, you may want to limit any risk exposure resulting from their activities. 
• Providing high-risk activities: Whether you’re a bounce house rental company or a skydiving company, you’ll want participants to assume the risk of the activities you provide. 

Types of hold harmless agreements

There are three types of hold harmless agreements:

Benefits of hold harmless agreements

Using a hold harmless agreement in business has several benefits:

• It releases liability. The primary benefit is to reduce the liability of the party requesting the hold harmless agreement. 
• It makes your business insurable. Some insurance companies won’t insure you for specific activities or events if you don’t have a hold harmless agreement in place.
• It reduces legal problems. When hold harmless agreements are used, there are fewer lawsuits and legal battles. [Related article: Why You Should Develop a Relationship With a Business Lawyer ]
  
• You could earn more business. In the construction industry, hold harmless agreements help win more business because hiring companies will appreciate that the risk is transferred away from them. 
• It protects your business’s reputation. You maintain a better brand reputation with fewer lawsuits. The hold harmless agreement makes it clear who is responsible when something goes wrong. 

What to include in a hold harmless agreement

There are many online templates 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 elements: 

• The protected party: This is the person or company that wants liability shifted away from them. Be sure to include their legal name and contact information. 
• The other party: This is the party that assumes the risk. Include their name and contact information. 
• Agreement date: This may be before or at the onset of the activity listed. 
• Location details: This is where the event or activity will be conducted.
• Activity details: List the exact activity that has them assuming risk — for example, bungee jumping or electrical work. Be sure to clearly describe what’s being done.
• Effective dates: Specify when the hold harmless agreement starts and for how long it will be effective. 
• Signatures: All parties should sign and date the agreement. 

Mark Fairlie contributed to this article.