What is a Hold Harmless Agreement and When is It Needed?
Note: This article provides general information on hold harmless agreements. This is not legal advice. If you are looking to leverage a hold harmless agreement or if you are asked to sign one, you should consult legal counsel for information specific to your business.
What is a hold harmless agreement? That’s an important question. A hold harmless agreement, which is sometimes called a hold harmless letter, is a “release of liability” clause, typically in a contract, that indemnifies and protects one party from the financial consequences of damage or injuries caused by another party. One party agrees not to sue the other, and also to pay the costs that the party might incur for certain events.
Along with small business insurance, hold harmless agreements can help your company avoid large financial burdens associated with business damage or injuries. A hold harmless agreement provision may also be referred to as an indemnification provision. A hold harmless provision is usually requested alongside a request to be an “additional insured” on the other party’s insurance — making clear the goal of shifting the financial burden of unfortunate outcomes to the other party.
Who Needs a Hold Harmless Agreement?
Virtually every business can find itself in a situation where it’s prudent to have a hold harmless agreement. It’s best to consult your legal counsel or advisor on whether your company needs hold harmless agreements with other parties.
It’s also important to understand that hold harmless agreements have limitations and may not be ironclad protection from lawsuits. Being well-informed about hold harmless agreements before creating or signing them is essential.
Many Kinds of Businesses Use Hold Harmless Agreements
Many types of companies enter into hold harmless agreements as part of business engagements. For example, stakeholders in the construction industry often use this type of agreement.
In the context of a construction project, a general contractor (GC) often will require the subcontractors on a job to sign a hold harmless agreement. In doing so, the subcontractors are agreeing that if the GC is sued by the client, the subcontractors will make the GC whole for the financial costs. Still, it’s important for the GC to have business insurance, since it can address lawsuits if a subcontractor goes out of business, has no insurance, or isn’t able to meet their financial obligations to the GC.
Even if you’re not in the construction business, you may face similar scenarios where the actions of a third party might create potential liability for you. Incorporating hold harmless agreement language into your contracts may help minimize your risks.
Example of a Hold Harmless Agreement in Action
Here’s an example of how a hold harmless agreement can protect you. You’re a GC who has been hired to oversee the construction of a commercial building. You hire an electrician as a subcontractor to do the wiring. To protect yourself from any mistakes they might make, you have them sign a hold harmless agreement.
Later, faulty wiring starts a fire that causes significant damage to the building. The owner decides to file a lawsuit against you and others to recover the cost of repairs. Fortunately, the indemnify and hold harmless agreement you have with the electrician means that the electrician (or the electrician’s insurer) is responsible for defending you and reimbursing your costs.
Of course, liability issues are rarely that simple and straightforward. But, in general terms, that’s how a hold harmless agreement protects your business.
Where to Get a Hold Harmless Letter Template
If you need a hold harmless letter template to help you create one for your business, there are many available online. However, it’s always a good idea to talk with a lawyer when drafting any type of legal agreement—hold harmless agreements or anything else.
A lawyer can help you understand what kinds of activities can be covered by a hold harmless agreement and what activities can’t, what takes place in terms of legal procedures if the other party to a hold harmless agreement is sued, etc. So, after finding a hold harmless agreement template that you think will work for your company, you should have a lawyer review it and provide feedback.
Other Ways That Businesses Benefit From Hold Harmless Agreements
A hold harmless clause can provide other benefits, like:
- Decreasing your legal expenses. Keep in mind that even if you aren’t at fault in a particular situation, being sued means you have to defend yourself and may have to pay for legal representation.
- Decreasing your stress level. Making sure that any work you’re responsible for gets done correctly is challenging enough. A hold harmless agreement means you have less to worry about because you made clear beforehand who bore the financial responsibility for unfortunate accidents.
Different Types of Hold Harmless Agreements
An attorney can give you the details, but keep in mind that there are different scopes and types of hold harmless agreements. For example, you may see references online to broad, intermediate, and limited hold harmless agreements, as well as unilateral and reciprocal agreements.
Hold harmless agreements may also have different focuses, like general, services, and use of property. The kind of work you do, the kind of business relationships you enter into, and other factors will determine the type of hold harmless agreement that’s right for your business and a particular project or engagement.
It’s also important to be aware that a hold harmless agreement can be discarded by a judge if it’s not drafted properly. For instance, if it’s too broad or has aspects that violate public policy, an agreement can be deemed invalid. But for the specifics on how these aspects of the law work, you should consult an attorney.
Be Cautious About Signing Hold Harmless Agreements Requested By Others
In the same way that it’s important to talk with a lawyer when you’re drafting a hold harmless agreement that you request from someone else, it’s also a good idea to get legal counsel if you’re asked by another party to sign one. That’s especially true if you’ve never done so before.
Hold harmless agreements are common, and over time, you’ll become familiar with their wording and legal ramifications. But until then, you should have an attorney review agreements and confirm that they’re properly drafted and that it’s acceptable for you to sign them.
Be aware that signing a hold harmless agreement can have insurance implications. You should discuss with an attorney how your insurance and any hold harmless agreements requested from you work together.
Hold Harmless Agreements and Buying Insurance
If you’re looking to buy small business insurance like a business owners policy or BOP (also called property and liability insurance), you may be asked whether you obtain hold harmless agreements from your subcontractors. If you currently don’t do that, it’s important that you start requiring these agreements.
If you make it your standard practice to obtain hold harmless agreements from subcontractors or others you engage with, you may be able to get insurance at a lower cost. And, in some instances, if you don’t obtain agreements, you may even be declined coverage.
In addition, if you state that you have hold harmless agreements in place, subsequently report a claim, and then it’s discovered that you don’t have an agreement related to the claim, that claim can be denied.
But if you do everything right and a third party is the one that makes the mistake, the insurance piggybacks on top of the hold harmless to protect you. A hold harmless agreement from your counterparty and their insurance are helpful, but may rely on factors beyond your control. Adding your own liability protection is the belt-and-suspenders way of protecting your business.