Author: VU Faculty

Your insureds routinely sign hold harmless agreements with all kinds of entities...property owners, contractors, large corporations, municipalities, and others. How many of these contracts do you think are covered by your insureds' CGL policies and to what extent? In this article, we'll give you a few actual examples that may have you grabbing for the nearest defibrillation machine.

Here's the scenario: You get a call late Friday afternoon from a client who says, "Hey, I just signed a big, multi-million dollar contract with MegaGlobal Enterprises. It's got a few insurance requirements in it. I'll be faxing it over first chance I get just to make sure my insurance covers everything! My crew's heading out of town to the main job site first thing Monday morning and I'm heading to Rome for a couple of weeks of R&R with the missus. Let me know if you need anything. Caio!"

Later than night, a fax comes in and is waiting for you on Monday morning. The contract has three pages of insurance (and other) requirements, including the following passage:

To the fullest extent permitted by law, ABC Engineering, Inc. agrees to defend, indemnify and save harmless XYZ Construction, Inc. and Owner, as well as any other parties, which XYZ Construction is required under the Contract Documents to defend, indemnify and hold harmless, and their agents, servants and employees, from and against any claim, cost, expense or liability (including attorneys' fees), attributable to bodily injury, sickness, disease, or death, or to damage to or destruction of property (including loss of use thereof), caused by, arising out of, resulting from, or occurring in connection with the performance of the work by ABC Engineering, Inc., its subcontractors and suppliers, or their agents, servants, or employees, whether or not caused in part by the active or passive negligence or other fault of a party caused by the sole negligence of a party indemnified hereunder. ABC Engineering Inc.'s obligation hereunder shall not be limited by the provisions of any worker's compensation or similar act. ABC Engineering, Inc. hereby agrees that One Hundred Dollars and No/Cents ($100.00) of the Price constitutes the separate consideration for ABC Engineering, Inc. indemnity hereunder. Such amount shall be deemed paid out of the first invoice for payment paid hereunder.

Well, what do you think? Could there be some problems with this hold harmless provision? Wouldn't you like to get your hands on the guy who drafted this thing? It sounds like it was assembled from passages in a law book drawn at random. Just a few quick points....

"To the fullest extent permitted by law...."  Actually, this may be the only positive thing in the provision. At least your insured won't be held responsible if the other party deals drugs or commits murder (well, we don't think so).

"...as well as any other parties...."  Clearly the other party wants your insured to hold EVERYBODY harmless. In the context of the sentence where this appears, the other party not only wants your insured to hold THEM harmless, the other party wants all other parties named in another document to be held harmless. But it is not clear who those others are or what they will be doing which raises the question of how you will know if the right coverage is in place.

"...and their agents, servants and employees...."  No, by "agent," they aren't requiring your insured to hold YOU harmless (though that might be a very good idea). An agent is basically anyone you hire to do something for you. Gotta admit, that's pretty broad.

"...any...."  Your insured appears to be holding them (and potentially a few thousand other parties) harmless for ANY claim, cost, expense, liability, etc that can even be remotely attributable to BI or PD. The CGL, for example, covers BI and PD..it does NOT, though, cover ANYthing that arises out of those types of losses. We suppose that, if an injured party was in dire need of a cafè latte, your insured will have to send someone to Starbucks.

"...caused by, arising out of, resulting from...."  It is hard to imagine that a clever plaintiff's lawyer could not fit just about ANYthing into one of these reasons for a claim—it need not even be the direct or a primary reason for the claim—just somehow connected to it.

"...occurring in connection with...."  Your insured not only must cover ANY claim arising out of their work, but also anything related to it in presumably any way. It doesn't get much broader than this, and again, would not take much to find some way to bring most ANY claim under it. This must be one of those "KFC" clauses (Keep your Fingers Crossed).

"...its subcontractors and suppliers, or their agents, servants, or employees...."  Not only must your insured hold the other party harmless for work the insured does, they apparently agree to hold the other party harmless for any claims arising out of any work anyone does, including anyone who supplies them with products or services. Needless to say, your insured needs a hold harmless like this with all of their subcontractors, suppliers, etc. Then things will REALLY get interesting when a claim occurs! Gosh, just a minor claim could keep a battalion of lawyers busy for years.

"...or other fault...caused by the sole negligence of a party indemnified hereunder...."  This is the Big One, Elizabeth. It looks like your insured has agreed to hold the other party harmless, not only for negligence, but "other fault" (whatever that is, and to a creative plaintiff's lawyer, it could be most anything). Does your insured's CGL cover "fault"? It gets worse. Not only is your insured holding the other party harmless for claims arising out of your insured's (and many others') negligence, your insured will even pay if they do absolutely nothing wrong...they agree to pay even if XYZ Construction is SOLELY negligent...as long as it occurs "in connection with" your insured's work. Hmmm...sounds like your insured is basically providing them with an absolute...no exclusions...liability coverage...for anything. It is a good deal for XYZ Construction...if its sole negligence causes a claim, your insured will pay the freight!

"...shall not be limited by the provisions of any worker's compensation or similar act...."  Oops, there goes the ol' sole remedy theory.

Do you think there might be problems with this contract? Do you think liabilities might be created that aren't covered by the insured's CGL (or most other policies)? The sad thing is that hundreds or thousands of these types of onerous agreements are signed by business owners every day. For a sobering example of what can happen, check out the article "Subcontractor Must Indemnify General Even When Sub Was Not Negligent."

Some of them even seek to specifically control the indemnitor's insurance program. Requiring 30 days notice of cancellation is a common example. Often, the insurer can amend the policy to do that, but rarely with regard to cancellation for nonpayment. Recently, we looked at a hold harmless provision that required that the indemnitee be given 30 days notice if a policy was "materially amended." The insurer refused to honor this...and rightfully so.

Perhaps more troubling than these types of agreements are circumstances where agents are counseling insureds to join the bandwagon and execute their own hold harmless agreements with others. Here are two inquiries from agents:

• "We are working with a client and are interested in protecting him to the best of our ability. I was trying to locate an indemnification or hold harmless agreement and a waiver of subrogation that we can give him to use with his subcontractors."

• "We need a copy of a standard hold harmless agreement that our insured can have his subcontractors sign." [emphasis added]

It's doubtful that anything more needs to be said about the above other than: (1) there are no "standard" agreements of this type, and (2) unless you have a license to practice law, don't do it.

These agreements are not limited to your clients. Agents enter into contracts all the time, both insurance and noninsurance. For example, here's an excerpt from an actual E&S brokerage agreement:

• AGENT shall indemnify and hold BROKER harmless with respect to all claims, liabilities and costs, including attorney fees, which BROKER may be obligated to pay.

That's it...period. It doesn't say anything about the agent's contractual liability being limited to his/her own negligence. It doesn't even say that the liability has to relate to business the agent has placed through the broker. The agent is basically agreeing to assume full liability (both general and professional) for even the broker's sole and unilateral negligence, errors, omissions, and even deliberate or criminal acts of ANY kind!

Do you think your E&O policy would respond when the broker invokes this hold harmless clause? Here's an example of an E&O policy contractual liability exclusion:

• CONTRACTUAL LIABILITY.  Any liability assumed by the insured under contract unless the insured would have been legally liable in the absence of such contract.

Let's say that an agency producer tells an insured that a certain type of event would be covered. A loss occurs and the insurer rightfully denies the claim. The insured sues the retail agent, E&S broker and insurer. The hold harmless clause above requires the agent to pay on behalf of the broker. The E&O policy provision would respond since the agent is legally liable to the insured anyway. The hold harmless clause doesn't create the liability...the hold harmless agreement exists in tort law with regard to the insured.

On the other hand, let's say the broker, during a deposition, physically assaults the plaintiff's attorney, is sued and is assessed various civil damages and criminal penalties. The hold harmless agreement is so broad that that agent is probably liable under the contract.

In summary, it is important that insureds be advised to have all contracts reviewed by competent legal counsel who can identify the liabilities potentially being assumed. The agent and insurer can then work with the client to determine what liabilities would be covered by existing insurance, what exposures require additional coverages, and what risks cannot be addressed by available insurance products. Then the insured can make an informed decision to renegotiate the contract or implement alternative risk management strategies.