Financial Risk in Hold Harmless Contract Clauses

Most written contracts and agreements contain an indemnification or hold harmless clause. In short, this clause will create an obligation for one party to cover certain financial losses that may be incurred by the other party as a result of the contractual relationship. I have found that many business owners and contractors will easily incur this obligation by signing contracts with hold harmless clauses without even considering the financial exposure they have created. On the other hand, the party expecting to be held harmless in a given situation may find out much too late that the obligated party has insufficient financial resources to meet this obligation.

It has been my experience in negotiating contracts that other than those dealing with the business/performance details of the agreement, the hold harmless/indemnification clause is one of the most vigorously negotiated clauses. Often, I will try to exact fairness by having the parties agree to provide mutual indemnification. But this is not enough. Any party seeking indemnification should ensure that the promise to indemnify is backed up either by sufficient financial assets or policies of insurance. A party giving indemnification should also insist upon a clause expressly limiting that party’s liability or financial exposure. Of course, a limitation of liability clause is the second most vigorously negotiated part of any agreement.

Nonetheless, the party providing the indemnification should check with its insurance carrier to determine the exact amount and type of insurance coverage provided under its current policies. This will help determine the necessary limitation of liability. On the other hand, the party requiring indemnification should also require that the indemnifying party carry sufficient insurance to meet its exposure.

Finally, a party providing indemnification should retain the right to conduct the litigation and settlement of any claim triggering the hold harmless obligation.