By Quenda Behler
A contractor recently approached me with the following
question: "My liability insurance company says I must have
indemnification or hold-harmless clauses in all of my contracts
with my customers and my subs. What's the deal with
Hold-harmless and indemnification agreements are basically the
same thing: risk management devices that manage risk by passing
it off onto somebody else -- kind of like a game of financial
tag. One person gets another person to accept his or her risk
of having to pay a liability claim. Sometimes the contractor
promises to indemnify (hold harmless) the property owner.
Sometimes a sub promises to indemnify the contractor. Sometimes
the property owner or the contractor promises to indemnify the
The point is that if you include a clause in your contracts
requiring property owners and subs to indemnify you for
liability claims, you've passed the risk of a claim on to them
-- and your insurance company is off the hook.
For example, suppose some passing stranger is injured by
falling debris on the job site and successfully sues the
property owner for negligence. That's a liability claim. If Sam
the Contractor has agreed to indemnify the property owners for
third-party liability claims (by third party, I mean
deliverymen, building inspectors, wandering children,
trespassers, and so forth), Sam has to pay the claim. (If Sam's
contract had required the property owners to indemnify
him, the property owners would have to pay that claim,
whether they were sued or Sam was sued.)
Reasons for Indemnifying
Why on earth would Sam agree to this? Why would anyone? The
first reason has to do with who's got the most clout in a
negotiation. In other words, if you're a contractor, how badly
do you want the job? If you're a property owner, how badly do
you want the job done? Indemnification of the other party can
be a bargaining chip.
Another reason is to make an honest effort between the parties
to apportion the cost of an accident to the person who's most
likely in a position to prevent it. In effect, the parties
agree about that in advance.
Until recently, contractors didn't have to worry particularly
about indemnity promises, because most liabilities incurred by
a contractor were paid by his or her liability insurance.
Indemnity agreements worked as a sort of liability musical
chairs to see whose insurance company -- the property owner's,
the contractor's, or the sub's -- would wind up paying a claim.
Nowadays, however -- especially with certain kinds of risks --
that buck doesn't always stop at the insurance company, so the
party promising indemnity might have to pay a claim out of his
How could that happen? After all, paying off liability claims
is what liability insurance is for, and it costs some pretty
back-breaking premiums, too.
Here's how it could happen: By excluding certain kinds of
claims from their coverage -- like claims about mold, lead, and
some types of exterior cladding -- insurance companies are
reducing the risk that they might actually have to pay out some
money. Insurance companies do not want to pay if you are sued
by a homeowner because, for example, after you installed an
exterior insulation finish system, a lot of ugly mold grew
under it and the homeowner's children developed asthma.
What You Can Do
So what can you do to protect yourself? First, review what
your insurance actually covers. Don't assume that because you
had an insurance review a few years ago, you're okay. Second,
read your contracts to see exactly what you're promising to
whom. Don't skip over the legalese. If you aren't sure what
something means, ask your attorney.
While you're reading that legalese, see who pays the legal
bills if someone claims to have been injured and sues. Even if
you promise someone indemnification, you don't want to also
promise to pay his legal bills -- especially if the injured
party loses in court.
In the following example, the legal language is unacceptably
broad from the standpoint of the contractor because it includes
words like "every" and "claim" in addition to
The contractor shall at all times indemnify
the property owner harmless from every claim,
demand, liability, and loss....
This means that the contractor might have to pay a
settlement or even an invalid claim. Also, the contractor seems
to be accepting the obligation to pay the property owner's
attorney fees and, depending on state law, the obligation to
pay claims occasioned by the property owner's negligence.
Even though the next example doesn't use the magic terms "hold
harmless" or "indemnity," it is nevertheless an indemnity
promise, because the contractor is promising to reimburse the
property owner if the property owner is forced to pay a claim
relating to an injury on the job site, even if it's the
property owner who was negligent:
The contractor will pay and discharge any and
all liability against the property owner rising out
of the subject matter of the contract....
On the other hand, you do want to be sure the legalese gives
you the right to get involved in the court battle if you need
to. For example, suppose the property owner's father-in-law
comes over to check on the work, and he falls into the
excavation and hurts himself. You want the right to defend
against the father-in-law's lawsuit yourself, because the
property owner might not be willing to vigorously defend
himself by doing what amounts to calling his father-in-law an
The sample clause that follows gives the contractor the right
to get involved early on if he or she chooses:
The property owner shall immediately notify
the contractor of every claim that has potential
liability, and the contractor shall have the option
to intervene at any level to resolve any claim with
What Else Can You Do?
Sometimes you will want to be the beneficiary of an indemnity
clause. If there's an iffy situation on the job site -- if, for
instance, the property owners are still living there -- you
want to be sure the homeowners have agreed to indemnify you (in
case their five children have friends over on the weekend and
they all play in the excavation).
The next example requires the property owner to indemnify the
contractor if the property owner is careless or negligent; it
also gives the contractor the right to intervene if the
property owner does not defend himself adequately:
The property owner shall indemnify and hold
the contractor harmless from all claims, demands,
liability, and losses which result from the
carelessness, negligence, or failure of the
property owner to act in a careful and prudent
manner. The contractor shall have the option to
intervene in the claim at any level.
Also, make sure your subs have agreed to indemnify you in
case you have to pay a claim for their negligence. Get and keep
copies of their insurance certificates so you know they can pay
you if their negligence costs you money.
A last word of warning: There is, in tort law, a concept
called implied indemnification, which means that you could be
on the hook for indemnification without having anything about
it in your contracts. So get out those liability insurance
polices and read them carefully to make sure you're covered in
the event someone demands indemnification from you.has practiced and taught law for over 25
years and is the author of
Plain-English Legal Guide