Author: Craig Stanovich
Your customers routinely execute hold harmless and indemnity agreements with all manner of entities...property owners, contractors, landlords, manufacturers, distributors and many others. In this article, we'll give you some insight to help you better understand the workings of these agreement and how your customer's CGL policy may or may not provide coverage for the liability created by such agreements. While interpreting contracts is a matter of law, acquiring a better appreciation of the concepts underlying hold harmless and indemnity agreement may be useful.
Your customer emails to you their latest contract for a new project they will beginning shortly. The contract has three pages of insurance (and other) requirements, including the following clause entitled “Indemnification:"
To the fullest extent permitted by law, ABC Subcontractors, Inc. agrees to defend, indemnify and hold 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 Subcontractors, 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 or caused by the sole negligence of a party indemnified hereunder. ABC Subcontractors, Inc.'s obligation hereunder shall not be limited by the provisions of any workers' compensation or similar act. ABC Subcontractors, Inc. hereby agrees that One Hundred Dollars and No/Cents ($100.00) of the Price constitutes the separate consideration for ABC Subcontractors, Inc. indemnity hereunder. Such amount shall be deemed paid out of the first invoice for payment paid hereunder.
Purpose: Risk management has traditionally referred to this Indemnification clause as non-insurance contractual risk transfer. That is, the financial consequences of liability are being transferred from one party – the indemnitee – to another party – the indemnitor and that transfer is outside of an insurance policy. In our example, the indemnitor is ABC Subcontractors, Inc. and the listed indemnitees are XYZ Construction, Inc. and the Owner. To use the terms found in ABC's CGL policy, by the above Indemnification clause, “the insured [ABC] is obligated to pay damages by reason of assumption of liability in a contract or agreement."
In other words, ABC has assumed, by contract or agreement, the liability of XYZ and the Owner. But let's put aside why ABC has assumed the liability of others. While understanding the business reasons for agreeing to be responsible may be important, do not let such questions distract from the facts here – ABC has agreed to answer for the liability of the indemnitees.
Indemnify and Hold Harmless- While indemnify and hold harmless are generally considered synonyms – there are some slight legal differences that are not important in our example. In general, the terms mean “a contractual provision in which one party agrees to answer for …liability or harm that the other party might incur." It is important is to recognize that in the context used, “hold harmless" does not mean that the indemnitor has released the indemnitee from any liability the indemnitee might have directly to the indemnitor. Here, hold harmless is not the equivalent of an exculpatory clause.
Instead, indemnify and hold harmless transfer the liability the indemnitee would have to others. ABC's CGL policy, definition of “insured contract," says as much under part f. “…under which you [ABC] assume the tort liability of another [XYZ and Owner] to pay for 'bodily injury' and 'property damage' to a third person or organization." [Italics added]
Does NOT provide Additional Insured Status-The agreement by ABC to indemnify and hold harmless XYZ and the Owner does not confer on any indemnitee the status of an additional insured on the CGL policy of ABC. Nor does ABC's CGL coverage for ABC's obligation to indemnify XYZ or the Owner result in additional insured coverage for XYZ or the Owner. The definition of “insured contract" in the CGL, which obligates the standard ISO CGL insurer to pay for liability assumed by contract or agreement, is independent of and has nothing to do with additional insured status. This notion is too often misunderstood or confused – including by insurers and attorneys.
Most of the rest of the Indemnification clause is intended to describe when, how and to what extent ABC is responsible for the liability of the indemnitees. As the above is a rather dense paragraph stuffed with wording we do not see on a daily basis, breaking down a few words and phrases might shine some light on what some of this means and how it works.
"To the fullest extent permitted by law...." This clause is called a “savings clause" and is intended to allow the courts to enforce the portions of Indemnification clause that are not contrary to the law. Absent the savings clause, the court may void the entire Indemnification. The savings clause also recognizes that, despite the bedrock principles of the freedom of contract, certain indemnity clauses are against public policy and void – the courts will not enforce them. In the construction industry, which our example uses, the majority of states have statutes that limit or outright prohibit certain indemnity provisions. Such statutes are generally called anti-indemnity statutes.
“…defend…" In addition to ABC's promise to indemnify and hold harmless the indemnitees, ABC has also agreed to defend the indemnitees. Here, the Indemnification clause does not address how ABC is to handle its obligation to defend. Some indemnity clauses specify that the indemnitee will choose the legal counsel, etc. In any event, the cost to defend an indemnitee is usually covered by a CGL policy – provided “Liability to such party [indemnitee] for, or for the cost of, that party's [indemnitee's] defense has also been assumed in the same 'insured contract'…" However, with some limited exceptions, the cost of defending an indemnitee is considered to be damages payable under indemnitor's [ABC's] CGL policy – and thus any such expenses reduce the policy limit.
"...as well as any other parties...." This means that any other parties that XYZ is obligated to indemnify, ABC will also be required to indemnify. The other parties are found in the Contract Documents – which are generally the documents between the owner and general contractor. This “flow down" provision is common in construction contracts – the obligations of the contractor to the owner will “flow down" to the subcontractor – and continue to down to lower tier subcontractors. While the ABC's CGL definition of “insured contract" contemplates this “flow down" and does not require to name or even know the identity of the other party – part f. “under which you assume the tort liability of another party…" caution is advised here. For example, any obligation to indemnify an architect, engineer, or surveyor for certain professional services is not an “insured contract." So, while ABC may be required to indemnify such parties, ABC's CGL insurer will not be required to pay on behalf of ABC damages or costs for certain professional services.
"...and their agents, servants and employees...." Similar to the above, not only is ABC agreeing to indemnify XYZ and the Owner, ABC is agreeing to indemnify and hold harmless the agents (generally those authorized to act on behalf of the indemnitees), servants (and older term for employee and probably redundant) and employees of XYZ, the Owner, and the other parties found in the Contract Documents. While this broad wording seems to be overreach, such wording is fairly common in indemnity agreements. Again, ABC's CGL insurer's definition of “insured contracts" part f. is not limited to specific persons or organizations, whether specifically named or included by category. “Insured contract" coverage applies when assuming the tort liability of “another party."
"...any claim ... attributable to bodily injury, sickness, disease, or death, or to damage to or destruction of property" This means the indemnity claims, including the obligation to defend, must be caused by bodily injury or property damage. This substantially restricts the scope of the indemnity. For example, the indemnity does not obligate ABC to indemnify for delay costs due to ABC's failure to deliver materials to the site on schedule – if the delay was not caused by damage or destruction of property. On the other hand, the CGL does not provide coverage for all bodily injury or property damage – numerous exclusions apply to the CGL coverage. Note that the indemnity does not contemplate any exclusions. The result is this indemnity is broader than the CGL coverage. While it is a common requirement that “contractual liability" insurance “cover the indemnification" the CGL rarely does so. This means that your customer invariably is assuming liability that will not be insured.
"...caused by, arising out of, resulting from...occurring in connection with..." This phrase is meant to stipulate that in order to trigger the indemnity, the bodily injury or property damage must be linked in some way to the work being performed by ABC or its subcontractors. Phrases such as “arising out of" usually require only minimal causal connection. This means the link between the work and the bodily injury or property damage may be remote – the work does not need to be the only cause or even the dominant cause of the resulting bodily injury or property damage to trigger the indemnity. While the link to the work does vary by contract, “caused by or arising out of" is common verbiage to trigger the obligation of indemnity.
"...its subcontractors and suppliers, or their agents, servants, or employees...." Contrary to common belief, a subcontractor, such as ABC, is not automatically vicariously liable for the acts of its independent contractors. Therefore, it is common for a subcontractor to agree to indemnity the general contractor or owner for work of lower tier subcontractors and suppliers engaged by ABC (as well as for the subcontractors and supplies agents, servants or employees) – and that is what is happening here.
"...caused by the sole negligence of a party indemnified hereunder." This may be the most important portion of the Indemnification clause as it sets forth the scope of the indemnity. Here, ABC has agreed to answer for the liability of the indemnitee even if the indemnitee is solely at fault. This type of indemnity is generally referred to as a “broad form" indemnity – all of the financial consequences of the risk are transferred to ABC. While the indemnity is still triggered only if the work by ABC or its subcontractors is linked to bodily injury or property damage, XYZ or the Owner will still be entitled to indemnity even if the bodily injury or property damage was caused by the sole negligence of XYZ or the Owner.
An example: An employee of ABC is seriously injured at the jobsite. The necessary link to ABC's work is established as the employee was working at the jobsite at the time of the injury. Also, the cause of the bodily injury is XYZ dropping a beam on the employee's head. When the ABC employee brings suit against XYZ, the court determines the injury was the result of XYZ's sole negligence. In the above indemnity, ABC would have to not only defend XYZ, but ABC would have to indemnify XYZ for all of the damages it owes to ABC's injured employee.
If ABC has a standard ISO CGL policy, the scope of this “broad form" indemnity is included within the definition of “insured contract" – ABC's obligation to indemnity XYZ for damages XYZ owes to the injured employee is covered by ABC's CGL policy. However, as with many provisions of the ISO CGL policy, the definition of “insured contract" can be changed by endorsement, restricting the scope of indemnity covered by the CGL policy. For example, the endorsement Amendment of Insured Contract Definition CG 24 26 eliminates coverage for sole negligence indemnity and would not pay on behalf of ABC in the above example. Or the endorsement Contractual Liability Limitation CG 21 39 removes part f. of the definition of “insured contract," leaving ABC with no coverage for any obligations to indemnify XYZ, regardless of the scope of indemnity.
The “broad form" indemnity that is being analyzed here is the most onerous indemnity clause for the indemnitor, ABC. Consequently, most, but not all, states would find this “broad form" indemnity to be void and unenforceable in a construction contract. Such prohibitions against “broad form" indemnity are usually the result of a state's anti-indemnity statute. See below descriptions of “intermediate" form and “limited" form indemnity agreements.
"...shall not be limited by the provisions of any workers' compensation or similar act...." The exclusive remedy provision of some state's workers' compensation acts prohibit indemnification agreements applicable to injuries to the employees of the indemnitor. For example, even though Maine does not have an anti-indemnity statute, the Maine Workers' Compensation Act renders void as contrary to exclusive remedy any indemnity agreement purporting to require indemnification from an employer for injuries to that employer's employees. However, Maine does allow the employer to waive, for purposes of an indemnity agreement, that exclusive remedy protection – provided the waiver is clear and explicit. The above quoted phrase is the type of wording in which an employer has agreed to waive exclusive remedy protection pursuant to the state's workers' compensation act and thus the indemnity agreement will not be negated by exclusive remedy.
“…One Hundred Dollars and No/Cents ($100.00) of the Price constitutes the separate consideration…" Some states require specific or separate consideration, or payment, in order to enforce the transfer of liability in an indemnity agreement. Although not included in our sample indemnity agreement, a few states require a dollar limit within an indemnity clause.
Indemnify and Hold Harmless – Intermediate Form Indemnity – Unlike “broad form" indemnity, the scope of “intermediate form" indemnity is restricted to concurrent or shared negligence. In our example, an “intermediate form" indemnity would require ABC to indemnity others only 1) if one of the indemnitees and ABC were BOTH negligent; or 2) if ABC was solely negligent. A typical example of “intermediate form" indemnity might be "…caused in whole or in part by the negligent acts or omissions of the ABC, but excluding the sole negligence of a party indemnified hereunder.
“Intermediate form" indemnity can be further divided into additional categories – full indemnity and partial indemnity. In other words, if the indemnitor is obligated to the indemnitor for shared negligence, does the indemnitor have to pay all damages (full indemnity) or a certain share of damages (partial indemnity)? The difference can be substantial – if ABC was 1% at fault and XYZ 99% at fault, under full indemnity ABC would pay 100% of the damages; under partial indemnity, ABC would pay only 1% of the damages.
Indemnify and Hold Harmless – Limited Form Indemnity – The obligations of the indemnitor in a “limited form" indemnity are restricted to responsibility for the indemnitor's own fault or own negligence. A typical example of “limited form" indemnity might be "…caused solely by the negligent acts or omissions of ABC.
Insurance Coverage – Whether the liability assumed by contract, or “'Bodily injury' or 'property damage for which the insured is obligated by reason of the assumption of liability in a contract or agreement," is covered by the policy turns largely on the policy definition “insured contract." Stated differently, the CGL policy excludes liability assumed by contract – but adds coverage back via an exception to the contractual liability exclusion – the exclusion does not apply to liability assumed in an “insured contract."
While the definition of “insured contract" is usually broad, it is sometimes easy to overlook that all of the CGL policy exclusions apply (absent a specific exception for “insured contact" noted within an exclusion) to liability assumed in an “insured contract." For example, while ABC has assumed liability damage to or destruction of property, ABC's CGL policy excludes property damage to ABC's own work – exclusion L. Damage to Your Work. If indemnity is demanded of ABC for property damage to its own work, ABC will likely be required to indemnity XYZ or the Owner but will not have insurance for this obligation.
A Matter of Law - A troubling aspects of indemnity and hold harmless agreements are circumstances in which insurance agents and brokers are asked to advise customers on the appropriate content of an indemnity or hold harmless agreement. Or worse still, insurance agents or brokers are asked (or volunteer) to draft or supply an indemnity or hold harmless agreement to its customers. While having a working understanding and the role of such agreements is of value, recognize that such advising or drafting of indemnity and hold harmless agreements is the practice of law. Here are a couple inquiries from insurance agents or brokers that typify the problem:
- "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]
There are no "standard" agreements of this type, and unless you have a license to practice law, you should not be drafting or supplying such agreements.
It may be valuable to you to have a working understanding of indemnity and hold harmless agreement as a possible source of your customer's liability. Being informed about the basics of such agreements may also be helpful in making more productive your interactions initiated by your customer's legal counsel. After all, the less the wording found in indemnity and hold harmless is a foreign language to you, the more productive those discussion will be when you are contacted by your customer's legal counsel.
Last Updated: February 14, 2020
 Garner's Dictionary of Legal Usage, at 444, “The evidence is overwhelming that indemnify and hold harmless are perfectly synonymous."
 Black's Law Dictionary – Eighth Edition – Definition of Indemnity Clause.
 This is one reason why an indemnitee will also require to be added as an additional insured to the CGL of the indemnitor. The cost of defending an insured is usually a Supplementary Payment and therefore outside of the policy limit. The costs of defending an insured does not reduce the limit.
 Attributable to means “caused by" Definition of attributable from the Cambridge Academic Content Dictionary © Cambridge University Press
 While a number of state's anti-indemnity statutes include an “insurance exception," this exception generally means the anti-indemnity statute does not apply to an insurance company's promise to indemnify. The insurance exception does not automatically act to restore the validity of an otherwise unenforceable and void indemnity agreement merely because the scope of the prohibited indemnity falls within the CGL's definition of “insured contract." Nonetheless, some courts have conflated enforcing the requirement to purchase insurance – often additional insured coverage - with enforcing a separate non-insurance indemnity agreement.
 The Contractual Liability exclusion of the CGL also does not apply if the liability would have been imposed on the insured without the contract or agreement.