September 18, 2015
Avoid hold-harmless clauses? No!BY ROBERT KENNALEY
Although written for this year’s winter maintenance issue, this month’s topic should be of interest to anyone who enters a contract for maintenance or construction.
Winter maintenance contractors, of course, need insurance. Being properly insured is not only a sound business strategy, but clients will almost always require proof of suitable insurance under the contract. As many of you are aware, however, obtaining proper insurance, at a good price and from a good carrier, can sometimes be difficult.
Over the years, the process of underwriting winter maintenance contracts has become more specialized for good and obvious reasons, given the number of claims and risks involved in the industry. The number of companies offering insurance to winter maintenance contractors has dwindled, and those that continue to do so have tightened their underwriting policies. The underwriters look at the percentage of work a contractor commits to winter maintenance (as opposed to other activities such as summer maintenance or construction), at claims history, at the experience and training of employees and at application methods and processes.
In addition, those underwriters have, in the last five to 10 years, become more interested in the terms and conditions of the contracts into which their insureds are entering. The CNLA has been actively working with insurers to help educate contractors about the difference between a good contract and a bad contract.
Throughout this process there have been growing pains. One area involves the ‘hold harmless’ or ‘indemnification’ clause.
Conflicting advice from professionals
Recently, a client of ours advised that his insurance company had asked to review his contract as part of the underwriting process. The contract in question included a hold harmless/indemnification clause that was very similar to the one adopted by Landscape Ontario and CNLA as part of the standard form contract (available for download at horttrades.com/standard-form-snow-and-ice-maintenance-contract). The insurance company objected to the clause on the basis that it clearly stated the contractor would indemnify and hold harmless the client in certain circumstances. We were told, the clause should be removed; the insurance company did not believe that the contractor should ever acknowledge that the owner would be held harmless or indemnified.
Unfortunately, the insurance company’s advice was simply wrong. Equally troubling is the fact that this company’s approach is becoming more and more common. Brokers have often stated that they do not want their contractors agreeing to indemnify the client — in any circumstance. Some have suggested that the removal of the clause is a condition of getting insurance.
In giving this advice or taking these positions, however, the companies do not understand the difference between good and bad hold harmless/indemnification clauses. More to the point, the advice fails to recognize that a good hold harmless/indemnification clause is extremely important, because it provides protections that the contractor would not otherwise have. Simply put, where there is no hold harmless/indemnification clause, the contractor will be exposed in very real ways.
Good clause states the obvious
Allow me to elaborate. A good hold harmless/indemnification clause does nothing more than give clients what they already have. The clause essentially says to the client, “Look, if I screw up, I will pay. If I breach my contract or am negligent, I will pay.” The reality is, however, that the client really doesn’t need the contractor to admit this in the contract; if there is no such clause, the client will still be able to claim against the contractor if he or she suffers damages due to the contractor’s screw-ups (i.e. breach of contract or negligence).
By analogy, saying to a contractor that his contract should not acknowledge his obligation to indemnify, is like saying he should not write a will, because this would be admitting he is going to die. It is like saying that he should not admit that his five-year-old is his responsibility, because he shouldn’t formally admit that he has that responsibility. The reality is, of course, that we are all going to die and our five-year-olds are our responsibility. It doesn’t change anything to admit this.
So why do we want a hold/harmless/indemnification clause? Why not just let the chips fall where they may, and take the clause out? The answer lies in what a good hold-harmless/indemnification clause can do for us. A properly-worded clause sets out and limits the scope of the indemnification. Just as we prepare wills to control what happens when we die, we prepare hold-harmless/indemnification clauses to control what happens when we screw up. The good hold-harmless clause clarifies what the indemnification is for, and indeed, rolls back what the client would otherwise be entitled to in the absence of a clause.
Provide specific protection
So how does a good hold-harmless clause clarify and roll back liability? Well, the first thing it does (or should do) is clearly set out that the indemnification will only be in relation to claims arising from the contractor’s breach of contract or negligence. A bad hold-harmless clause is not clear in this regard. Clauses that provide that the client will be indemnified for any claim “relating to the contract” (or in relation to any other unclear set of circumstances), for example, should be avoided. Similarly, clauses that clearly provide that the contractor will indemnify even if not at fault should not be agreed to. Simply put, a good hold-harmless/indemnification clause should clearly indemnify for only the contractor’s breach of contract or negligence, and nothing more.
A good hold-harmless/indemnification clause will also, however, go further than this. It will also provide that the contractor will only pay in relation to personal injury or property damage. This means that the contractor will not have to pay for pure economic loss. He will not have to pay for someone’s lost profits or revenues in the event that the factory or shopping mall he was to maintain could not open because the contractor didn’t show up.
A good clause will also expressly limit the scope of your indemnification to the limits of your insurance. This means that if you have agreed to provide $5 million in insurance under the contract and a claim arises that ends up costing the client more than your $5 million in insurance, the client will be out of luck for the difference.
Finally, the good hold-harmless/indemnification clause will expressly provide that the indemnification will not be provided unless the client gives the contractor notice of the potential claim within a reasonable period of time after the client first becomes aware that it might exist. While the time frame can vary, it should not be more than several days.
Good hold-harmless/indemnification clauses are important. While they acknowledge liability in some circumstances, they don’t give the client what the client doesn’t already have. Indeed, although a good hold-harmless/indemnification clause acknowledges liability in some circumstances, it clarifies what those circumstances will be and rolls back the scope of the indemnification to personal injury or property claims and to the limits of the contractor’s insurance, where proper and timely notice of the claim is provided. It is therefore important that contractors come to understand the difference between good and bad clauses, and to seek advice in that regard if the language under discussion is unclear.
Robert Kennaley of McLauchlin & Associates practices construction law in Toronto and Simcoe, Ont., and speaks and writes regularly on construction issues. He can be reached for comment at 416-368-2522 or at email@example.com. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.