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Whether you’re working with subcontractors, vendors, or business partners, there is increased risk any time a third party is involved. Your business may held liable for another party’s actions, and in order to reduce legal liability, many businesses make use of a Hold Harmless Agreement.
What is a Hold Harmless Agreement?
A Hold Harmless Agreement, also known as a hold harmless clause is an agreement on the part of one party not to hold the other party legally responsible for any danger, injury, or damage. You may be familiar with this type of agreement as a consumer if you have ever participated in an activity like ice skating, horseback riding, or bungee jumping. When you sign a business’s Hold Harmless Agreement before the activity begins, you renounce your right to sue the business in the event of an accident.
Hold Harmless Agreements are a common precautionary measure, especially in industries like construction, real estate, and special events. These agreements are commonly found as clauses in larger business contracts and can help companies avoid unnecessary litigation or damages when they engage in a business relationship with a third party.
Is Hold Harmless Clause the same as Indemnity?
A Hold Harmless Agreement or hold harmless clause is often also called an indemnity agreement or clause. While in legal circles, there may be some debate about the exact meaning of “indemnity” vs. “hold harmless”—some experts argue that “hold harmless” protects against both liability and losses, while “indemnity” protects only against losses—practically, they are one in the same. In fact, you may often see the two together in contract language, stating that a party shall “indemnify and hold harmless.”
Who needs a Hold Harmless Agreement?
Hold Harmless Agreements are common in cases when there is a high degree of personal injury or property damage risk. If you hire a contractor, rent out your property, or hold an event, you open yourself up to third-party liability. Examples of areas where Hold Harmless Agreements are common include:
Real Estate. If you rent your property to another party and they are injured or suffer damage to their property, they may have grounds to sue. Hold Harmless Agreements can substantially reduce this risk.
Construction. Property owners, contractors, and subcontractors face large liability risks given the nature of the construction industry. For example, a contractor and property owner could be held liable if a subcontractor’s work causes injury to someone or damages someone’s property.
Events. If you sponsor, host, or organize an event, you may be held liable for any injuries or damage that occurs. For example, a client hires your event planning firm to organize their annual 5k fun run. If an attendee is injured, your company may be sued.
Types of Hold Harmless Agreements
Unilateral vs. Reciprocal
Hold Harmless Agreements may be either unilateral or reciprocal. In a unilateral Hold Harmless Agreement, one party agrees not to hold the other liable. Unilateral agreements are commonly used in business agreements with consumers; for example, if you own a trampoline gym and require your customers to waive their rights to sue if they are injured. In a reciprocal Hold Harmless Agreement, both parties agree not to hold each other liable.
- You hire a construction company to renovate your storefront. The construction company includes a Hold Harmless Agreement in their contract with your business, stating that their company would not be held liable if anyone is injured as a result of their construction work. You request to add an additional clause to release your business from liability in case anyone from the construction company is injured on your property. This reciprocal agreement indemnifies both parties from injury liability.
Limited vs. Intermediate vs. Broad
Three basic types of Hold Harmless Agreements are used: limited, intermediate, and broad. These forms are often seen in contracts in the construction industry.
Limited form. This type of agreement ensures that only the responsible parties are held liable, and losses are allocated according to the percentage of fault that is determined. In practical terms, a subcontractor who signs this type of Hold Harmless Agreement with a contractor essentially would only be responsible for whatever portion is determined to have resulted from the subcontractor’s negligence or omissions. This type of form is also known as a comparative fault indemnity agreement.
Intermediate form. In this agreement, the indemnitor (the party providing indemnity) agrees to hold the indemnitee (the party being held harmless) harmless except in cases where the accident or damage was a result of the indemnitee’s sole negligence. In practical terms, a contractor would not take on any liability, even if they were partially or mostly at fault. The subcontractor would assume all liability for accidents or negligence. This type of form is the most common type you’ll see in the construction industry.
Broad form. In this agreement, the indemnitor agrees to completely absolve the indemnitee of liability for any accident, even if it was the result of the indemnitee’s sole negligence. In practical terms, this type of agreement is rare, because it means that the contractor could commit an act of gross negligence, and the subcontractor would have no right to sue. Many courts will not honor this form of agreement and it is unenforceable in many states, as it may be considered too broad in scope.
What are the Benefits for Businesses that have Hold Harmless Agreements?
The primary benefit of a Hold Harmless Agreement is that it reduces liability for the party being held harmless. These agreements are an important preventative measure to protect your business’s financial health and reputation when entering into a business relationship with a third party. Other benefits may include:
- Winning business.More often than not, Hold Harmless clauses are required in construction contracts, meaning subcontractors generally need to take on more of the liability as a part of doing business. Taking on more of the risk in an agreement will make it easier for other businesses to trust your company and enter into business agreements with you.
- Reducing legal headaches.Businesses with Hold Harmless Agreements in place are less likely to be involved in lawsuits or legal battles with regards to liability. Because the goal of a Hold Harmless Agreement is to reduce or eliminate liability for the indemnitee, there is a much lower chance of the indemnitee being sued or involved in drawn-out legal dealings. Furthermore, Hold Harmless clauses make it clear who should take on the liability, preventing any confusion that would lead to a lawsuit.
- Protecting your reputation.A legal battle reflects poorly on your business, and the last thing you want is to develop a reputation for being sued or suing others. Hold Harmless Agreements spell out how liability is shared, avoiding any finger-pointing or blame-shifting in the event of an accident.
Hold Harmless Agreement vs. Waiver of Subrogation
While they deal with similar concepts—coverage and protection against liability claims or losses—Hold Harmless clauses and waivers of subrogation are fundamentally different clauses and agreements.
A Hold Harmless Agreement obligates one party of an agreement not to hold the other party legally responsible for any danger, injury, or damage. Essentially, one party is held free from liability in the case of an accident or damage.
A waiver of subrogation obligates one party to give up the right for their insurer to subrogate or to step in on the insured’s behalf to recover any losses by suing the party at fault. These waivers are commonly required by companies who hire others to perform a service or come onto their property to do work.
- Your business hires a construction firm to come in and build an addition to your office building. You require the construction firm to waive their right to subrogation. During construction, an incident occurs where your existing building structure is damaged. The construction firm’s insurer covers the damages, and given the waiver of subrogation, they do not try to recover their losses through an additional lawsuit.
Limits of a Hold Harmless Agreement
Though Hold Harmless Agreements are a great way to lower your chances of a lawsuit, they are by no means airtight. Negligence, coercion, illegal activities, or an overly broad scope of terms are just a few of the reasons why a court might nullify a Hold Harmless Agreement. Additionally, if one party is unable to pay damages due to lack of funds, the other may be held liable, even if they are protected by a Hold Harmless Agreement.
- A construction company is working on a construction project on your property. A group of teenagers sneaks onto the site and starts shooting a nail gun, causing bodily injury. to a 13-year-old boy. You have a Hold Harmless Agreement that says that your liability is limited in the event of an accident, but the construction company is on the brink of bankruptcy and is unable to pay the full cost of the lawsuit. You may be held partially liable and forced to pay for the injury.
Consider combining your Hold Harmless Agreement with liability insurance for maximum coverage in the event of an unforeseen accident.
If you work in a high-risk industry and want to take steps to reduce the chance of lawsuits, a Hold Harmless Agreement can be a useful tool. Companies with Hold Harmless Agreements are sued less, and businesses that agree to them are more attractive to business partners. Litigation is expensive and time-consuming. Hold Harmless Agreements, when constructed properly, can save you a significant amount of money in the long run.