Hold harmless agreement

A hold harmless agreement protects your business against lawsuits by requiring the parties with whom you are doing business to refrain from suing you under certain circumstances.

Hold harmless agreements are a staple of the construction, real estate, and service industries, especially in firms that engage in high-risk activities. Even if you’re not in these industries, you might benefit from including hold-harmless language in contracts if you’re concerned about minimizing your liability exposures.

Any time a third party uses your property, attends an event you’re sponsoring, or performs work for you, consider having them sign a hold harmless agreement. For example, you may want to include one when:

• You’re renting or leasing your property and you don’t want to be legally liable if someone gets hurt or suffers property damage while visiting the renter or lessee.
• You’re hiring a contractor or other service provider to work on your property and don’t wish to be held liable for that person (or his or her employees) getting injured while working on your project.
• You’re sponsoring an event that involves physical risks – for example, sports – and don’t want to be held responsible if someone gets hurt.
• You’re planning a business venture with another party and don’t want to assume the legal risk.
• You’re proposing changes to a covenant (a written promise between two parties) and wish to insulate yourself from potential legal disputes.

A hold harmless agreement insulates you from the negative impact of business litigation by:

Lowering your lawsuit risk: Businesses with hold harmless agreements get sued less often.

Reducing your legal expenses: Since firms with hold harmless agreements are sued less frequently, they don’t need to hire attorneys as often. Given today’s hourly rates for lawyers, this can save you a lot of money.

Decreasing your stress and anxiety: Doing business is challenging enough without also having to worry about your vendors and customers suing you. Hold harmless agreements help you focus on your work instead of your chances of getting sued.

Minimizing your reputational risk: If the media covers a business lawsuit in which you’re involved, your reputation can take a serious hit. With a hold harmless agreement, you can avoid public legal battles.

Hold harmless agreements fall into three main categories:

General: A general hold harmless agreement insulates the protected party against legal action related to a specific activity. The legal protection is framed narrowly. For example, it might only apply for participation at a specific company-sponsored event.

Services: Protects against liabilities that occur while someone performs a defined service. For example, a contractor on a construction job agrees to hold harmless the general contractor who hired him.

Use of property: Protects property owners against lawsuits arising from a third party renting or using their property.

Information about hold harmless agreements abounds online, including templates for building your own agreement. However, it’s best to get help from an attorney to avoid any unexpected risks.

Never ask a business partner or provider to sign a hold harmless agreement without first consulting with your attorney. If you’re the customer or property renter or lessee, read the agreement carefully and get your attorney’s advice before signing it. Why? Because signing an agreement might shift the other party’s legal liability onto you.

Generally, hold harmless agreements are a mainstream legal tool that judges accept as valid. However, if they are improperly drawn – too broadly and in violation of public policy – a judge can throw them out. This might expose you to the legal liability you hoped to avoid.

When you sign a hold harmless agreement as a vendor to – or customer of – another company, you’re essentially agreeing to accept legally liability that otherwise might fall on that firm. This has three implications for your existing general liability insurance:

1. General liability policies often exclude coverage for “contractual obligations,” meaning the agreements you strike with third parties. Since a hold harmless agreement is a contract, your insurer might not cover any losses that result from you signing it.

2. General liability policies also have other exclusions for things such as worker’s compensation claims or architectural design errors. If your signing of a hold harmless agreement results in you being sued for either of those reasons (among others), your general liability policy might not cover your loss.

3. Your general liability insurance has policy limits, which means the insurer will pay for your covered claims up to, but not exceeding, those amounts. If signing a hold harmless agreement creates a legal judgment that exceeds your general liability policy limit, you will have to pay for it on your own.

For the above three reasons, it’s important to check with your insurance broker before signing a hold harmless agreement.