Shifting the Burden
Why indemnification agreements may not be fair
By Diane J. Geller
Indemnification clauses, also known as hold harmless clauses, are often demanded by customers as part of their standard agreements with staffing providers. But frequently, neither party really understands their implications.
Indemnification means one party assumes liability for a situation (even when the responsibility is not theirs), relieving the other party of the financial consequences and responsibility for the situation. Indemnification clauses are a product of attorneys and risk managers trying to shift the financial risk away from their company, even though the degree of financial shift may not be a reasonable measure of the business responsibility. As a result, the party actually responsible for the loss may not be the one that pays for it.
Further, insurance policies, which historically have covered such risk transfers, generally no longer do.
How it Works
A dangerous situation exists at the customer’s site and the vendor’s employee is severely injured. The contingent worker collects workers’ compensation under the vendor’s policy and sues the customer for his bodily injury. Because the vendor signed an indemnification clause requiring it to defend and indemnify the customer for the claims made by the vendor’s employee against the customer, the staffing firm is on the hook for the customer’s legal fees as well as for any judgment awarded to the employee by the courts.
Through the contractual wording, all responsibility may ultimately reside with the vendor, even if it and its worker did nothing wrong.
The fair allocation of risk between the vendor and its customer should be based upon what is inherent in each company’s business. This means that the staffing vendor’s risks should be employer-related, such as payment of wages and benefits, payroll taxes, background checks etc. — liability for the service the vendor is providing. The customer should remain liable for its own operational risks including risks related to the negligence and acts of its workforce.
In short, indemnification responsibility should lie with the entity with which the business risk is associated.
Many vendors feel pressured to sign indemnification agreements because the customer claims “every other vendor signs it.” Often the customer’s own management is not aware of the risks that their attorneys are asking the vendors to assume. It is imperative that companies understand what they are signing. There are a couple of choices.
Allocate the risks according to the business interests of each of the parties.
Know the risk. Be aware of the risk that the company is assuming each time it signs a contract with an indemnification clause.
Check your insurance. Determine if the company’s insurance policies provide coverage for indemnification agreements. If not, find out if coverage can be added through an endorsement, or on a case-by-case basis, and of course its cost.
Finally, if these steps aren’t leading to an acceptable solution, you can pass on the contract.
The enforceability of indemnification agreements are affected by state law so be certain that your attorney is familiar with the area. Those of you who are reluctant to spend money to have your attorney review the clauses need to recognize that the possible exposure is extremely significant. Therefore, in reality you cannot afford not to address indemnification clauses in customer contracts.
Diane J. Geller is a partner with the law firm of Gentry Locke Rakes & Moore LLP. She can be reached at email@example.com.
A Sample Clause
“Supplier shall indemnify, defend and hold [customer] harmless for any and all losses, damages, claims, liability and expenses, including costs and reasonable attorney’s fees and including claims for any and all personal injury or bodily injuries (including death) to any and all persons including vendor’s employees, and for any and all damage to property caused by, resulting from, arising out of, or in any way connected to this Agreement or the services provided hereunder.”