Why a Hold Harmless Indemnity Agreement Needs Review

Why Every Hold Harmless Indemnity Agreement Deserves a Second Look

In an enterprise environment, there are often hundreds or thousands of agreements with various vendors, partners, clients, and service providers.

In reviewing the agreements, many organizations will often find multiple versions of the hold harmless indemnity agreement, each with different circumstances and assumptions.

The reality is that these agreements build up over time within the repository with little review. Some may be outdated, while others may be risky from an aggressive perspective.

The reality is that many organizations are unaware that they are harboring many risks within the repository of their own agreements.

Key Takeaways

• A hold harmless indemnity agreement is a contract that specifies the transfer of liability between two parties.
• Indemnity agreements can be rendered unenforceable by jurisdictional laws and anti-indemnity statutes.
• In some cases, insurance policies can exclude assumed liabilities.
• New-age CLM tools can help with the identification and management of indemnity clauses.
• Effective management of indemnity clauses can turn the contract library into a risk management tool.

What Are the Three Forms of Indemnity in Contracts?

Not all hold harmless indemnity agreements transfer liability in the same way. Yet, many people assume indemnity clauses follow a standard pattern. They do not. Indemnity clauses exist on a spectrum.

Understanding this spectrum can help legal teams determine if the contract is beneficial to the organization.

Limited Form Indemnity

The limited form is the most balanced expression of the concept of indemnification because it limits the liability to one’s own negligence. In the limited form, the parties remain liable for the damages that result from their actions.

For example, in the case where the contractor is liable for damaging the property due to negligence, the contractor is liable for the claim. In this case, the contractor is not liable for the damages resulting from the actions of the client.

This approach is often viewed as sustainable by legal practitioners because it is the closest expression to the traditional concept of negligence. This is the reason why the limited indemnification clause is less challenged legally.

Intermediate Form Indemnity

In the intermediate form, the scope is widened to include cases where both parties are liable for the damages. In this case, one party agrees to pay damages caused by negligence on both sides, although this is still subject to the exclusion clause if the other party is entirely at fault.

This is common in industries with many stakeholders working together on projects. These include construction, production, and even service delivery. It is used to simplify the management of liabilities in cases where many parties work together.

Broad Form Indemnity

This is the most aggressive indemnity clause. It is the one where one party can be liable for damages even if the other party is entirely at fault.

This structure is perceived by many legal professionals to be inherently unbalanced. As a consequence, several jurisdictions have introduced restrictions on the validity of broad indemnity clauses.

Some states in the United States, particularly in the construction industry, have introduced anti-indemnity legislation. These laws either limit or completely prohibit the validity of broad indemnity clauses.

It is believed to be a growing legal consensus that overly aggressive risk-shifting provisions can be detrimental to fair contractual relationships.

Understanding Jurisdictional Risk in Indemnity Agreements

Even the best contract can be unenforceable if it is in direct conflict with the jurisdiction. The validity of the hold harmless indemnity contract is dependent on the jurisdiction in which the contract is to be executed.

A contract clause may be perfectly legal in one jurisdiction and unenforceable in another.

State-Specific Hazards

Construction contracts are perhaps the most illustrative of any of the contracts in which jurisdictional risks are most evident. A number of US states have restrictions on the use of general indemnity clauses in construction contracts due to the unfair implications for subcontractors.

States such as California, New York, and New Jersey have very stringent anti-indemnity laws that regulate the scope of liability that is possible by contract. The laws are designed to prevent companies from requiring partners to assume liability for damages not caused by them.

Texas and a number of other US states have different laws and regulations regarding indemnity clauses.

Using Technology for Jurisdictional Intelligence

Contract lifecycle management systems are also helping to mitigate the problem of jurisdictional risks. Advanced systems are able to analyze an entire contract repository and pinpoint every use of a hold harmless indemnity contract within those contracts.

Once these clauses have been identified, they can then be grouped according to risk and jurisdiction. This can be achieved by comparing the clause wording to known legal constraints.

This can be done utilizing artificial intelligence models. For example, in a contract executed in California, which has broad indemnity provisions in violation of local statutes, the artificial intelligence model can immediately highlight these provisions.

Closing the Insurance Gap

Organizations often believe that their insurance coverage automatically includes obligations created by a hold harmless indemnity agreement. However, insurance agreements often include exclusions that negate this assumption.

The Exclusion Trap

Under commercial general liability insurance, there is often an exclusion for assumed contractual liability, which means that insurance companies will not cover obligations created by an indemnity clause in a contract.

This exclusion can lead to unforeseen financial risk when the claim is asserted. For example, assume a vendor agrees to defend the client with a broad indemnity clause in the contract for services. If a third-party injury occurs during the project, the vendor is liable to defend the client based on the contract.

Linking Contracts with Insurance Intelligence

New contract lifecycle management technology can mitigate this risk by linking contract clauses to insurance intelligence. Rather than treating contracts and insurance policies as standalone documents, the organization can link the indemnity clause to the insurance policies intended to support it.

This enables the organization to verify if the hold harmless indemnity contract is supported by the insurance policies. It can flag the stakeholders if the clause extends the policy limits or is outside the policy terms, prior to the contract being executed.

From Clause Detection to Contract Standardization

Identifying risky clauses within the contract library is the starting point. It is important to note that the next steps involve processes to rectify the contract language and ensure the prevention of similar risks in future contracts.

Using Sentiment Analysis to Detect Risk

Generative AI technology provides the means to analyze contract language using new techniques. Rather than focusing on the location of indemnity clauses, the technology can assess the sentiment and intensity of the language used in the contract.

Aggressive clauses in contracts can include language that assigns liability “regardless of fault” and statements asserting “sole responsibility” for damages. It is important to note that this language indicates the level of risk being transferred between parties.

Generative AI technology can analyze this language and determine the level of risk. It can sort the contracts to ensure the legal team is focusing on the contracts with the most aggressive language related to the hold harmless indemnity agreement.

Automated Redlining for Compliance

After the problematic clauses are identified, the organization needs to develop a methodology to rectify these clauses. The best methodology is to develop pre-approved contract templates.

These contract templates can be developed to reflect the current legal standards and insurance requirements. In cases where the contract is non-compliant, the contract management system can automatically propose the revised contract language based on the approved contract templates.

These revised contract languages can be approved by the legal team and communicated to the other party.

In the long run, the entire process can be standardized to ensure all newly executed hold harmless indemnity agreements conform to the organizational risk policies.

Can Contract Management Become a Competitive Advantage?

A hold harmless indemnity agreement is one example where the conventional contract management process is no longer sufficient. These clauses are the determining factors in any dispute, accident, and regulatory action.

Unmonitored indemnification provisions can lead to situations where organizations unknowingly assume obligations that exceed their risk tolerance or available insurance coverage.

Outdated provisions, jurisdictional issues, and overly burdensome liability shifts can quietly accumulate until a legal dispute places these provisions in the spotlight. Contract management can completely change this situation by bringing a level of visibility and accountability to every aspect of a contract’s lifecycle.

Dock 365 contract management software can assist in achieving a level of control over contracts by bringing contract management directly into the Microsoft 365 ecosystem.

With Dock 365, legal departments can identify every hold harmless indemnification agreement across the enterprise, track jurisdictional compliance requirements, and leverage standardized contract templates designed to limit liability risk.

Organizations that effectively manage their contract libraries possess a significant advantage in reducing legal risk, improving compliance, and maintaining financial stability.

Schedule a demo of Dock 365 today and discover how a Microsoft 365-based contract lifecycle management solution can transform your contract library into a powerful risk management tool.

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