If you’re a business owner, it’s wise to purchase general liability insurance to protect your business from financial loss in case of a lawsuit.
But even if you’re protected financially, lawsuits can be time-consuming and bad for your reputation.
The good news is that there are several steps you can take to minimize the possibility of lawsuits. Besides taking safety precautions, you can consider adding a hold harmless agreement to your contracts.
What Is a Hold Harmless Agreement?
A hold harmless agreement is a clause in a contract that states the other party agrees not to hold you liable for risk. Typically, they apply to the risk of bodily injury or physical property damage.
Businesses that facilitate high-risk activities, such as bungee jumping, include hold harmless language in contracts to reduce liability. The client (the person bungee jumping) assumes the risk of the activity and agrees not to sue the company in case of accident or injury.
The above example describes a one-way (or unilateral) hold harmless clause. But you can also have mutual (or reciprocal) agreements where both parties agree not to hold the other liable for risk.
For example, if you hire a contractor to build a deck for you, a reciprocal hold harmless clause would protect the contractor from liability if someone incurs an injury on the deck after it’s built while also protecting you from liability if the contractor becomes injured while working on the project.
You may also see a hold harmless clause referred to as a:
- Hold harmless letter
- Hold harmless release
- Release of liability
- Waiver of liability
Hold Harmless vs. Indemnity
You may hear a hold harmless agreement referred to as an indemnity agreement. But hold harmless and indemnity have slightly different meanings.
Indemnification refers to an agreement where one party agrees to compensate the other for losses.
Suppose you own a car rental company. Your customer rents a car and signs a contract where he agrees to “hold harmless and indemnify” your company. And while driving the rental car, your customer is hit by another driver and sustains an injury.
The HHA prevents him from suing your company for his injury. And the indemnity statement holds him responsible for compensating you for rental car damage and—if the other driver sues your company—for their damages.
To get maximum protection, you should use both terms in your contracts.
Types of Hold Harmless Protection
You can divide HHAs into three main categories based on the situation:
General: protects one or both parties against legal action related to a specific activity (such as a bungee jumping tour), which is defined in the agreement.
Services: insulates the protected parties from liabilities that occur when someone performs a defined service. For example, when a general contractor hires an electrician, both parties can agree to hold each other harmless.
Use of property: protects a property owner against lawsuits when a third party rents or uses their property. For instance, if a company rents your space for an event, they agree not to hold you liable for risk.
Which Businesses Use Hold Harmless Releases?
Companies that offer high-risk services or experiences, such as skydiving, bungee jumping, or horseback riding, use hold harmless releases to reduce liability.
Besides that, they are commonly used in business contracts in the construction and real estate industries.
Construction companies use HHAs when hiring subcontractors to perform a service, and real estate companies transfer property liability from the seller to the buyer (or renter).
In the real estate industry, hold harmless provisions are most commonly used when someone purchases a foreclosed property with outstanding lien issues, meaning the property may be listed as collateral on someone’s debt. The provision states that the responsibility of resolving any lien issues moves from the seller to the buyer.
HHAs in the Construction Industry
Hold harmless clauses are used by construction companies when hiring independent contractors. They typically protect the general contractor from legal action by the subcontractor.
There are three forms you can choose from when including an HHA in your subcontractor’s contracts:
Limited: The limited form states that the subcontractor assumes liability only for their role in accidents and negligence where they are at fault.
Intermediate: The subcontractor assumes all liability for their accidents and negligence, but it does not hold them accountable for the general contractor’s accidents or negligence.
Unlike the limited agreement, it doesn’t matter which party is at fault. Even if the general contractor is found responsible, the subcontractor remains liable for his related actions and omissions during the construction project.
Broad: An insured subcontractor assumes all liability for accidents, their own negligence, and the general contractor’s negligence. The broad form is prohibited in certain areas because of its vague terms. Where it’s accepted, the subcontractor may have to finance their own liability with additional insurance.
Of these three, the intermediate form is most often used in construction contracts.
When to Use an HHA
As a business owner, lawsuits are one of the last things you want to deal with, even if you have liability insurance.
The main benefit of including a hold harmless letter in your contracts is that it lowers the risk of lawsuits, which can reduce your legal expenses and protect your business’s reputation. That being said, you don’t need to include a release of liability in every contract you sign.
Here are some specific situations or reasons you might consider adding a hold harmless:
- You are renting or leasing your property to a third party and want to protect yourself from legal action or other potential liability (such as an insurance claim) if an incident occurs.
- You run a business where your customers engage in high-risk or highly physical activities and want to protect your business.
- You will be hosting an event and want legal protection in the case that an attendee gets injured during the event.
- You are hiring a service or subcontractor and want legal protection if your service provider sustains a personal injury while working for you.
- You are starting a business venture with another party and don’t want to be held liable for risk.
- You are making changes to a covenant (such as a restricted land use agreement) and want to prevent future legal disputes. For example, you own your home but want to make changes that involve a public area of your property. An HHA would protect you from liability for injuries sustained as a result of those changes.
Hold Harmless Agreements in Court
Generally, hold harmless releases are accepted as legally binding and will be enforced by a court of law as long as they are drafted correctly and include the required language.
Here are the situations where your HHA may not protect you from a lawsuit.
Broad or Vague Language
For an HHA to be legally enforceable, the signing party must understand the particular risks and agree to hold harmless the other party for risks specifically defined in the agreement. In other words, a business cannot have a broad “all-encompassing” HHA and expect to be protected from all lawsuits.
Some states frown on HHAs and have anti-indemnity statutes in place that limit the amount of risk that can be transferred between the parties of a contract. For the most up-to-date information, be sure to check your state’s anti-indemnity laws regarding your industry or consult with a legal professional.
Courts may nullify a waiver of liability if there is strong evidence that one party was coerced into signing.
Customers can sue for injuries that result from owner negligence unless the agreement specifically states that the customer will not sue for owner negligence.
A release of liability clause protects the signing parties, but not third-party providers involved in the service.
For example, let’s say someone goes bungee jumping and signs an HHA with the tour company.
If that person sustains an injury, they can’t hold the tour company liable, but they might be able to sue the equipment manufacturer.
What to Include in an HHA
To ensure the legal validity and enforceability of your hold harmless agreement, it’s best to work with a licensed attorney when drafting it.
At a minimum, the clause should include:
- Name of the person or party to be held harmless
- Name of the other party in the agreement
- Agreement date
- Event or activity details (ex. construction, skydiving, etc.)
- Effective date range
- Signatures of all parties
Hold Harmless Letters vs. General Liability Insurance
So far we’ve talked about protecting your business using an HHA.
But you may also be asked to sign a contract where you agree to accept legal liability as a vendor or customer. This may have implications on your general liability insurance.
In particular, check your general liability insurance policy for:
- Contractual obligation exclusion: A hold harmless agreement counts as a contract, and your insurer may not cover losses that result from you signing it.
- Exclusions for specific liabilities: Insurance companies may not provide compensation for claims under workers’ comp or architectural design error.
- Policy limits: Financial losses that result from you signing an HHA are still subject to your policy’s limits. You are responsible for any losses that exceed your insurance limits.
In general, it’s always best to consult with an attorney before you sign any legal documents where you agree to hold the other party harmless.
HHAs Can Protect Your Business
Having business insurance may cover your financial liabilities, but a proactive approach to liability can save you time, money, and protect your brand’s credibility. Even if your business doesn’t offer high-risk services such as skydiving, you should consider using hold harmless provisions especially if you’re in the construction, remodeling or real estate industries.