Hold Harmless Agreements and your Professional Indemnity

Hold Harmless Agreements and your Professional Indemnity

What is a “Hold Harmless” agreement and could this affect my professional indemnity insurance?

We often come across indemnity clauses in contracts which require one contracting party to “hold harmless” the other contracting party.

There are also judicial statements to the effect that an indemnity is a contract by one party to keep the other harmless against loss. So, is there a difference between an indemnity clause and a hold harmless clause? More particularly, what are their insurance implications from a company’s financial liability standpoint?

Essentially, a “hold harmless” clause gives the recipient of that clause (“the recipient”) the benefit of being “held harmless” – or “not be legally bothered” – by the other contracting party or any other party claiming against the recipient. A hold harmless clause is a risk transfer mechanism. In fact, the expression “hold harmless” is derived from the Latin word indemnis which means “not harmed”. The “hold harmless” obligation requires the grantor of that benefit to hold harmless the recipient from risks of potential loss as well as actual loss.

An example of a hold harmless clause is: “The contractor holds the principal harmless from any action, claims, liability or loss in respect of the performance of the services.” Under this hold harmless clause, the contractor is not only prevented from bringing any claim against the principal (even if the principal has contributed to the loss or liability in the first place),

This can have implications for Professional Indemnity Insurance, particularly if the insurers wish to subrogate against a party for a recovery after paying out a large claim for another party it turns out is actually liable. If this other party has a “hold harmless” agreement then insurers cannot do so. Unless disclosed and agreed to, Insurers may decline the original claim. Be careful with any “hold harmless agreement.