Hold harmless agreement

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. You may want to include one when you are:

• Renting or leasing your property and don’t want to be legally liable if someone gets hurt or suffers property damage while visiting the renter or lessee
• Hiring a contractor or other service provider to work on your property and you don’t wish to be held liable for that person (or their employees) getting injured while working on your project
• Sponsoring an event that involves high physical risks, such as skydiving, and you don’t want to be held responsible if someone gets hurt
• Planning a business venture with another party and don’t want to assume the legal risk
• Proposing changes to a covenant (a written promise between two parties) and wish to insulate yourself from potential legal disputes

Here are some examples of why it's important to combine careful contracting with the right insurance coverage.

• If you signed a hold harmless agreement, but the project takes a turn for the worst, a customer may still sue you. Without insurance, you could pay legal fees and damages out of pocket.
• Should a subcontractor damage property, a well-crafted hold harmless agreement plus insurance can help clarify who’s responsible.
• If you agreed to cover any loss in a contract, but your insurance only covers a portion. You could end up paying the rest yourself.

A hold harmless agreement is a type of risk management that insulates you from the negative impact of business litigation. It could benefit your business to invest in one as it may help with:

• 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 the typical attorney’s fees these days, 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. With the indemnification granted by a hold harmless agreement, you can focus on your work instead of worrying about your risks of being 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, such as small businesses and homeowners, against lawsuits arising from a third party that’s renting or using their property.

The three main forms of hold harmless agreements we see in the construction industry are:

• Limited: The subcontractor is held responsible for liabilities on a limited form; that is, for only their proportional part of the negligence or accident.
• Intermediate: The subcontractor is held responsible for all liabilities, but is not responsible for the general contractor's accidents or negligence. This is the most common form of hold harmless agreements in the construction industry.
• Broad: The subcontractor is held responsible for all liabilities, including the general contractor's negligence and accidents.

When you’re the signer of a hold harmless agreement, as a vendor to—or customer of—another company, you’re essentially agreeing to accept the legal liability that otherwise might fall on that firm.

This has three implications for your existing general liability insurance policy:

• General liability policies often exclude coverage for “contractual obligations,” meaning the agreements you strike with third parties. Since a hold harmless agreement creates a contractual liability, your insurer might not cover any losses that result from you signing it.
• General liability policies also have other exclusions for things such as worker’s compensation claims or architectural design errors. If signing 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.
• Your general liability coverage has policy limits, which means the insurance company 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 would have to pay the difference on your own.

For these reasons, it’s important to check with your insurance broker before signing a hold harmless agreement, to see how it impacts your insurance coverage.

Your insurance can be a critical safety net when signing hold harmless agreements:

• General liability insurance: Often covers claims you’re contractually obligated to pay for property damage or bodily injury.
• Contractual liability coverage: Specifically protects against liabilities assumed under a contract, including hold harmless agreements.
• Professional liability insurance / Errors and omissions (E&O): Covers claims arising from mistakes in your services you agreed to assume in a contract.
• Additional insured endorsements: Let your client add you as an insured on their policy—or vice versa—to share coverage and reduce exposure.

Review your policy carefully to ensure it matches the risks you’re agreeing to cover.

Small business owners can take steps to limit risk when signing hold harmless agreements:

• Ask for insurance coverage requirements from the other party.
• Limit liability to your own negligence rather than taking on all risk.
• Set a monetary cap on how much you’re responsible for.
• Request additional insured status if you’re asked to cover someone else.

Negotiating these points can protect your business without losing the contract opportunity.