There are risks associated with virtually every transaction you make. Even purchases at the grocery store have risks—perhaps the apples are actually bad, or the cereal has an unknown chemical in it. There is even risk associated with loaning your lawn mower to your neighbor.
When you make larger purchases or engage in transactions that may have a higher risk than the average deal, you may want to take extra precautions to shift your risk. Changing who will be liable when you loan your personal property or real estate out to friends and family can also save you time, money, and headaches. A hold harmless agreement or indemnity agreement allows you to change the normal laws regarding liability so that you can decrease your risk in a specific transaction or project.
When you indemnify someone, you are taking responsibility for the negative consequences of whatever happened. In the legal context, it usually means taking responsibility if someone sues the other party for losses or damages. For example, although you may not have actually contributed to an accident, you can still assume the legal responsibility if you agree to do so. This agreement allows a release of liability for the other party.
When someone is harmed by another person or entity, they often have the legal right to seek compensation (referred to as “damages”) from the party that injured them. Parties use a hold harmless agreement or indemnity agreement to specifically lay out who will be responsible if an accident or problem occurs. The parties use this contract instead of the common law rules in their state.
Whether the document is separate or incorporated into a large contract, a provision that one party will hold the other harmless essentially means that one party is going to take on the risk associated with the transaction.
Consider an example. Imagine that your business manufactures widgets. You contract with a designer of a new type of widget to manufacture a widget for him. As this is a widget that you have never seen before, you are concerned about the potential liability of poor design. You voice this concern to the designer, and he agrees to hold you harmless as to the design. He explains that if anyone gets hurt because of the new model, he will take responsibility. That is, if someone is injured because of a defect in the design, you are not legally liable for the related injury. You would still be responsible if you manufactured it incorrectly, however. The risk regarding design has shifted from you as the manufacturer to the designer. Without this contract, you may have been liable for both the design and the manufacture. The agreement offers you legal protection that you otherwise would not have had.
A hold harmless agreement (also known as an indemnity agreement or waiver of liability) is a good idea any time you want to shift risk from one party to another. You can protect other people from being sued by taking on the liability yourself as well. Parties often use these types of agreements if they are working together on a project or if one party is performing services for the other.
A hold harmless agreement may also be a good idea if you are allowing someone else to use your property or your equipment and you want to protect yourself against liability that might spring up because of their use. The real estate and construction industries both commonly use hold harmless agreements, and some sports clubs or recreational facilities will regularly use these types of contracts too. Rental car companies will also often use indemnity agreements so that the driver of the vehicle will be responsible for an accident, instead of the rental car company.
If your business is engaged in providing high-risk services or allows others to participate in risky activities on your property, a hold harmless agreement might also be a good idea. In fact, any time you work on a project with another party or another party uses your equipment, setting up an indemnity agreement is likely in your best interests.
Hold harmless agreements are for more than just business deals; they can be useful in your personal life as well. The most common example is when you are allowing someone else to use your personal property or real property.
Imagine that you have lent your boat to a friend for the weekend. Your friend was not paying attention and inadvertently steers the boat directly into the path of a nearby water skier. The water skier would have a claim against your friend as the driver of the boat and you as the owner of the boat for her injuries related to the accident, including her medical expenses, lost time from work, and pain and suffering. You still have liability as the owner of the boat despite the fact that you had nothing to do with the accident and you were not even there at the time it occurred. If, however, you had your friend sign an indemnity agreement before he left with the boat, then he alone would have to deal with the water skier in most circumstances. The same type of arrangement could be used for virtually any type of property—from vehicles to leaf blowers.
You may think that having friends and family sign a contract before they use your property is a little extreme—and it may be for certain goods (no one likely needs an indemnity agreement to borrow a book). However, this added protection can save you from facing financial hardship for something that you did not do. Even if you never need it, knowing that you have this arrangement can provide peace of mind at the very least.
There are generally three types of hold harmless agreements. They vary in what they will cover, and one type of arrangement may not work as well as another type for your particular situation.
Broad form hold harmless agreements will cover every activity referenced in the agreement. For example, if you and the other party are working together on a project, a broad form indemnity agreement will relieve you from liability for every aspect of the project. This includes your contributions as well as the other party’s contributions to the project.
These indemnity agreements are relatively rare because many people do not want to agree to hold another person harmless for something that the other person did. That would give the other person free reign to act irresponsibly with very little recourse. Some states will also not allow this broad agreement. It is also important to point out that this type of indemnity agreement is more comprehensive than most general liability insurance plans as well.
In intermediate indemnity agreements, you can be held harmless for everything related to the activity or project except for problems or injuries that you alone caused. That is, you will still be liable for your own negligence in an intermediate hold harmless agreement. Even if the other party contributed to the problem or damages, you likely would still be held harmless; you are only responsible for your actions alone.
In the construction context, this is the most common form of indemnity agreement between a subcontractor and a general contractor. In using this type of form, the subcontractor agrees to be responsible for his or her actions alone. Whether there will be indemnity depends on who was working on the project at the time of the adverse incident or who was acting in a negligent way.
A limited hold harmless agreement is sometimes referred to as a “Comparative Fault Indemnification Agreement.” In these agreements, one party agrees to hold the other party harmless for problems that arise from their own actions. The agreement essentially lays out that the party that committed the act that leads to the problem or injury will be liable. They may also be partially responsible if they contributed to the problem as well. This is unlike the intermediate hold harmless agreement because the other party in those agreements cannot be liable.
It is not uncommon to further limit liabilities in these types of agreements to a dollar amount. For example, the contract may state that you are liable for any losses related to the services you perform, up to $100,000. This limit often corresponds with related insurance coverage, but not always.
It is always a good idea to consider whether a hold harmless agreement will be helpful if you are working with someone else or if another person is using your property or real estate. Stop and think about what type of liability you may have before you enter an agreement. When you are unsure, it is better to err on the side of limiting your liability.
If you are on the other end of a hold harmless agreement, be sure to read it carefully to determine what type of indemnity agreement you are signing. Usually, a broad form agreement is not going to be in your best interest, so you should work with the other party to change the language so that it is either an intermediate or limited form. If the other party refuses to modify the language, you may not want to work with that person or entity. Do not take the risk of accepting responsibility for their actions if you can avoid it.
An indemnity agreement can be developed with or without insurance. It is completely separate from your insurance coverage. The party that has agreed to assume liability must do so regardless of whether they have insurance to cover the incident. However, insurance is often used in conjunction with a hold harmless agreement so that you have several layers of protection.
In some circumstances, the person or entity that is supposed to be relieved of liability may not be “held harmless” because the other party lacks the funds or resources to deal with their obligation under the contract. In these situations, it is possible that the other party will still be on the hook for damages. For this reason, some parties will ask the indemnitor to add them to their insurance policy, but this is not a requirement.
Not every state will honor a hold harmless agreement, particularly if the language is too broad. It is a good idea to use a form that is specifically tailored for use in your particular state or the state in which you do business.
Like every contract, if the individual who signed it was coerced or forced into signing the agreement, the indemnity agreement likely will not be legally valid. Certain industries may not be able to use hold harmless agreements at all; it may not be valid for some construction jobs, for example.
You should always take additional precautions to limit your liability in addition to using a hold harmless agreement. For the construction industry, this may mean taking extra steps to ensure that you have a safe worksite. If you own property that others use, for example, you should regularly check to make sure that the property is in good working order and perform standard maintenance. Combining an indemnity agreement with insurance is also a good way to decrease your overall risk.
Every state has slightly different rules regarding indemnity agreements. LegalNature offers step-by-step guidance to create a customized hold harmless agreement that is tailored to your state. Each form can also be adjusted for your need—whether it is property, activities, services, or contracts. Head to our legal documents section to find the form you need.
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