Indemnification agreements -- the dark side

There's many a tale that have been told about indemnification agreements--the headless indemnification agreement that drove a ghost train at midnight; the indemnification agreement that lured cars off a cliff; the indemnification agreement that hid in a basement, forever waiting for murderous opportunity. And then there are the really scary stories...

I heard some of these tales of horror--true stories of financial and personal ruin brought about by indemnification agreements--at our recent Co-employment & Risk Forum.

My hair was too much on end for me to remember all the details, but the upshot was that indemnification agreements often lead to uninsured loss on the part of staffing buyers and/or personal ruin on the part of small staffing firms.

Just in case you've never heard of an indemnification agreement, it's that small print often-beleaguered staffing firms are sweated into signing by large buyers with disproportionate leverage. It amounts to a contract that requires the staffing firm to take as much legal liability as can be horseshoed into a deal. Small staffing firms in particular often sign these because they have no choice.

And why shouldn't buyers use their leverage to push as much risk onto staffing firms as possible? Because staffing firms are not insurance companies. They don't have the deep pockets to absorb unlimited loss. Indeed, small staffing firms may be ill-equipped to make good on even a relatively modest settlement. 

So when a staffing-related loss occurs, yes, it will be the indemnifying staffing firm that is savaged first, but when the lawyers have finished picking clean the staffing is back to the staffing buyer they slowly, menacingly turn.

So what's the solution? Panelists at the conference recommended that, instead of using indemnification agreements, staffing firms and buyers should talk openly about what staffing-related risks are involved, openly share that information with an insurance broker, get insurance for those risks and then share the cost of the insurance, even if unequally.

Using insurance to handle risk--who knew?


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