HOLD HARMLESS CLAUSES: WHAT YOU SHOULD KNOW
By its nature, construction is a high-risk business. When a loss occurs — for example, a fire apparently started by electrical wiring — each of those involved in the project would prefer that “the other guy” pay for the loss. So-called “hold harmless clauses” in contracts are a way one party assures that the other party will pay for, or share the cost, of a loss. For the owner or general contractor, hold harmless clauses are a way to help keep insurance premiums lower by reducing risk exposure.
Hold harmless clauses tend to generate a good deal of concern and effort, as owners pressure the general contractor, who pressures subcontractors, who pressure their subs, each trying to get as much express indemnification as possible into contracts. Express indemnification secures or protects someone from legal responsibility for a loss — that is, holds him or her harmless.
There are three types of express indemnity clauses typically found in construction industry contracts — including some that can be found in the fine print on purchase orders.
A Type One (also called “broad form”) indemnity clause states that the indemnitor, the party taking responsibility for potential risk or loss, will hold the indemnitee, the protected party, harmless from the risk in question, even if the entire loss is caused by the indemnitee. An example would be if a contractor agreed to hold a project owner harmless for any claims arising from the project, even if the claim was caused solely by the owner’s negligence.
More common is the Type Two (“intermediate form”) clause, which requires the indemnitor to assume all of the risks associated with the subject, but not if the sole cause of risk is attributable to the indemnitee. Typical intermediate form language could include the contractor agreeing to hold the owner harmless from any and all claims arising from the project, provided such claim is caused in whole or in part by the negligent act or omission of the contractor and regardless of whether the claim is caused in part by the negligent act or omission of the owner.
A Type Three (“comparative fault”) clause holds the indemnitor responsible only for the loss caused by the indemnitor, or to the extent caused by the indemnitor. Typically, the contractor would agree to hold an owner harmless from any and all claims arising from the project, but only to the extent the claim was caused in whole or in part by the negligent acts or omissions of the contractor.
Some states have passed laws limiting the types of clauses that are allowed in contracts. Supporters of these limitations argue that the highly competitive nature of the business forces contractors and subcontractors to assume all the liability of a construction project, no matter who is at fault in an accident, if they want to win the bid. If an accident happens, the contractor could be forced into bankruptcy.
The law of the state where the work is performed is usually the law that applies. For example, a Detroit automobile company wrote a construction contract containing a Type Two express indemnification clause for work to be done in Delaware. When a loss occurred and the company tried to hold the contractor to the clause, the Delaware court threw the clause out entirely. Michigan recognized Type Two clauses, but they weren’t allowed in Delaware.
Feelings about hold harmless clauses generally follow one’s position in a chain of relationships. For the owner or general contractor, hold harmless clauses are always desirable. It’s a different story with subcontractors, although they are often a condition of doing business. It might not make sense, however, to agree to a hold harmless clause with a general contractor who has the reputation of operating unsafely or with outrageous demands, such as holding the architect harmless even in the event of a loss that was solely due to the architect’s error.