CWS 3.0: March 13, 2013

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A Deeper Look at Indemnification Agreements

Would your firm be willing to act as an insurance company for something that it has no control over? The obvious answer is no. But here’s the wrinkle that indemnification agreements introduce.

In a typical indemnification agreement, Party A (often a staffing supplier) agrees to indemnify Party B (often their client) for losses involving contingent workers. Depending on how the agreement is worded, this can mean that if there is a loss, Party A has to pay any damages it may owe, as well as any damages Party B may owe, as well as attorneys’ fees and costs for both Party A and Party B. In some cases, this arrangement is natural and appropriate. In others, it is less clear.

Insurance. In many cases (especially cases involving property damage or personal injury) Party A and Party B both have insurance that covers the loss. If Party A is indemnifying Party B, Party A is acting as Party B’s insurer, on top of the insurance Party B and Party A already paid for. It is often easier and more efficient for the parties to allocate risk and cost through insurance arrangements than through indemnification.

Workers’ Comp. In many contingent labor situations both the staffing supplier and its client are immune from personal injury claims because of the exclusivity of the workers compensation remedy. Yet either party risks contracting itself and/or the other party out of immunity by signing an indemnification agreement covering a loss that would have been covered by workers compensation exclusivity. It is in the interest of all parties to avoid having either party lose the exclusivity defense through indemnification.

Public policy. In some cases Party A may be indemnifying Party B for a loss that is entirely (or almost entirely) in Party B’s control. In other words, Party B can do something wrong, then make Party A pay for it. Whether indemnification agreements are enforceable and how they operate in the context are complicated issues that vary from state to state. Businesses should avoid signing indemnification agreements covering losses they cannot control. Businesses asking for indemnification would in some cases do better to manage risk through allocating the cost of insurance, rather than by having their business partner act as an insurer.

So, the message is: avoid signing overbroad indemnification agreements, and attempt, where possible, to allocate risk through agreed-upon insurance, rather than through indemnification. For many (but not all) risks, instead of using indemnification agreements, staffing firms and buyers can determine what staffing-related risks are involved and involve an insurance broker. Once the costs of getting insurance for those risks are established, then both sides can negotiate as to who pays what. Unfortunately, this is easier said than done. Businesses (including businesses in the contingent labor world) are sometimes presented with take-it-or-leave-it indemnification agreements and there is little room for discussion of alternate methods of costing, allocating and accounting for risk.

We get that the onus lies with the staffing firm. They want the customer’s business. But buyers need to remember that staffing firms are not insurance companies. Moreover, these agreements have their limitations and could cost the indemnifying party its tort immunity. While indemnification agreements make sense in some cases, they are not always the best tool for the job. It is in everyone’s interest to understand what indemnification agreements do and work together to manage risk. 

Eric  H. Rumbaugh is a partner with the law firm of Michael Best & Friedrich LLP, headquartered in Milwaukee. He represents employers in labor, employment and employee benefits law matters.

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